Move On To The Next Phase

John owns a working grain farm. It operates with no debt. John has $290,000 in debt. Should he continue to rent the farm out or sell it?

QUESTION: John in Arizona owns a working grain farm. It operates with no debt, and John has $290,000 in debt on his home, including $17,000 in consumer debt. Should he continue to rent the farm out or sell it? He gets $38,000 in rent from the land a year. He makes about $100,000 a year. Dave doesn’t like that John isn’t diversified.

ANSWER: You’re getting about a 3% rate of return. It’s not your only return on that land. Your other return on that land is as the value goes up. You’re seeing in excess of a 10% rate of return on this investment. Even though it’s not a cash-on-cash return, it is an overall return. You have a capital gain return and a cash return. You combine those two to see your return net of taxes and net of expenses and property taxes, those kinds of things. That’s called an internal rate of return to look at the capital gains as part of the picture.

I think the way to ask yourself the question is if you were sitting with $1.2 million in your hand, would you buy this farm, or would you go the other direction? You’re given all the positives about owning this farm. It’s great cash flow. It’s going up in value. It sounds like a good solid investment. But it is basically your whole world investment-wise.

I don’t like that you’re not diversified. You have everything tied up in one thing—actually one piece of property, not just real estate. I don’t like that. All of these markets go up and down. It’s not a guaranteed stream. For that matter, the things you all are growing may change. The commodities market may change.

With the exception of the emotional tie to the thing, just crunching the numbers, the lack of diversification, the fact that it moves you on to the next phase of your life, I like the idea of selling it. But I know that there’s going to be a heart tug when you do. I think you need to say that out loud to yourself and realize that’s going to happen. There may even be repercussions in extended family and that kind of thing. You may need to do some communication there upfront. Truthfully, if you were sitting on $1.2 million, you would not use it to buy this land today. You’d be debt-free, and you’d be more diversified. You’d be out there enjoying your life—not working for $7 an hour. I think all of that makes sense to me. That’s not to say you’re not going to work at doing something. You probably will. You won’t have to, and right now this thing is kind of holding you captive in more ways than one. Granted, it’s a sweet piece of property and a sweet situation overall.

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