Investment Conundrum

[Fishindude77]

So I was approached by an acquaintance about buying a nearby farm that I had made an offer on a couple years ago which they turned down.
Could probably buy the place for $190,000
Can generate $5,600 annual income from the place after paying the property taxes.
There really shouldn't be any other expenses as it's bare farm ground with a little bit of wooded area.
So that's just about 3% annual return.

We've got that money sitting around in cash and CD's earning little bit of nothing.
By spending this money we could get ourselves another +/- $4,000 per year spending money.
We would also own a pretty decent asset that would surely increase in value by $40,000 or so in ten years.
Real estate like this is not hard to sell and turn back into cash pretty quickly either, if you're not too greedy.

So the conundrum is ..... Is it worth reducing our "dry powder" cash significantly to improve returns on it?
There is a certain amount of comfort in having that liquid cash laying around, and as a retired guy I'll never build a pile of cash like that again without selling something.
Just something I'm kicking around.

[disneysteve]

What purpose does that cash serve? Is it your EF or do you have emergency funds in addition to that? As a retiree, you want to maintain a nice cash cushion.

If this isn't your EF and it's just extra cash, it may not be a bad idea. Certainly the 3% return is far better than what you're earning now.

Do you think the resale ability would change if interest rates were to rise? Right now, a 3% return sounds nice, but what if savings rates creep back up (not that that is going to happen anytime soon, and it wouldn't be sudden so you'd have time to try and sell it)?

[Jluke]

Was your original offer they turned down more or less than 190k?

did you factor in transaction costs for buying and eventually selling?

190,000 / 5600 is 34 years that your pile of cash would last or you would see the 190k again (if you don’t sell)

I think that is another way of looking at it.

BUT you have been very successful in your real estate investments so you know a lot better than I do.

[disneysteve]

Even though it's undeveloped land, are there any other expenses involved like property taxes, liability insurance, landscaping/snow removal, etc? Don't forget to factor that stuff in.

I am not a real estate investor so I come at this from a completely different mindset, but if I was sitting on 190K and wanted to boost my income, I'd be looking at something like a good dividend stock fund. We own VYM. 30-day yield of 3.17% and a 3-year average annual return of 5.74% so not only do you get the regular income but you get growth, too. Plus, unlike the land, it's simple to get money out, and you can do it incrementally as needed. Need to buy a car? Sell 20K worth of shares and keep the rest. Want to take a cruise? Sell 5K worth of shares and keep the rest. You can't sell just a piece of the property.

[kork13]

Confirm this annual income would come through renting out the ground as farmland? Hunting acreage? Or how are you monetizing it? Depending on that, I assume there are tax advantages to consider as well.

You call this money "dry powder" -- typically that means waiting for yet-unidentified investment opportunities. Besides this land deal, what else might your dry powder be intended for? (Serious question -- how do you see yourself wanting to use it?)

Personally, I think this is a great option, and right up your alley if I correctly recall your other exploits with land tracts. You are currently earning peanuts on this money, a condition that is likely to persist for at least the next couple years. You can realistically & reliably earn a reasonable income with your investment. Do unless you have different intentions on how you'd like to invest this money, I'd say go for the deal. Good luck!

[Fishindude77]

To answer a few questions:
We would still have several years worth of spending in cash, after this purchase.
I forgot about transaction / closing costs but that is just a one time deal and probably under $1000
Property tax is factored in. That's really the only expense since it's farm land. Might have to re-grade an access lane at some point, but I can do that. No added insurance expenses.
I feel like we're plenty invested in the stock market now.
The income is from cash renting the farm ground. Probably could pick up another $800-1000 leasing hunting rights if we wanted to.

[disneysteve]

Sounds like a good deal and a good way to diversify.

[scfr]

Do the reasons you wanted to buy the land several years ago still exist?
Why does your acquaintance want to sell?

[LivingAlmostLarge]

buy it. diversify and cash is paying crap as well as bonds now.

[bjl584]

I'd go for it.
The intangibles are that you could improve or develop the land, or get creative with leasing and further increase the income.

[srblanco7]

So I was approached by an acquaintance about buying a nearby farm that I had made an offer on a couple years ago which they turned down.
Could probably buy the place for $190,000
Can generate $5,600 annual income from the place after paying the property taxes.
There really shouldn't be any other expenses as it's bare farm ground with a little bit of wooded area.
So that's just about 3% annual return.

We've got that money sitting around in cash and CD's earning little bit of nothing.
By spending this money we could get ourselves another +/- $4,000 per year spending money.
We would also own a pretty decent asset that would surely increase in value by $40,000 or so in ten years.
Real estate like this is not hard to sell and turn back into cash pretty quickly either, if you're not too greedy.

So the conundrum is ..... Is it worth reducing our "dry powder" cash significantly to improve returns on it?
There is a certain amount of comfort in having that liquid cash laying around, and as a retired guy I'll never build a pile of cash like that again without selling something.
Just something I'm kicking around.

For me, a 3% return wouldn't justify the purchase as an investment. What are the intangibles - that is, why did you want to buy the property a couple years ago? And, why is the money sitting is cash & CD's at present vs. being invested?

[TexasHusker]

A crop-producing farm is an excellent hedge against inflation. I have a small cotton farm (240 acres) that produces 4/5% net annual income without me doing a thing. And the land is appreciating 2-3-4 percent per year. As inflation goes higher, so do commodities, and so does the land. There was a time not too long ago when this land was $250 per acre. Now it’s $1000 per acre.

It is a wonderful part of my portfolio and I’ll never sell it.

[LivingAlmostLarge]

A crop-producing farm is an excellent hedge against inflation. I have a small cotton farm (240 acres) that produces 4/5% net annual income without me doing a thing. And the land is appreciating 2-3-4 percent per year. As inflation goes higher, so do commodities, and so does the land. There was a time not too long ago when this land was $250 per acre. Now it’s $1000 per acre.

It is a wonderful part of my portfolio and I’ll never sell it.

How did you find a small cotton farm?

[Snicks]

I think it's simply a personal choice. It depends on your comfort level. Is the income you generate going to be from renting or are you doing actual farming? Either way , are those responsibilities you wish to take on? It's probably a good investment to have more real estate and and you seem to have a very good handle and understanding on the property and it's potential and local market so I think that it would be a very good buy if you want to take that on. However, if you simply prefer cash in the bank or you could invest your cash in other ways, then that is a good choice as well.

[TexasHusker]

I’m on the hunt for another farm...