Last year, Wisconsin dairy producer John Shea did something he never dreamed of doing early in his farming career. He invested in real estate that had nothing to do with farmland.
“The farm has been good for us, but there are other things that could help me diversify my portfolio,” he says, along with his wife, two adult children and a non-family partner. says Mr Shea, a 68-year-old farmer.
“We are new to investing,” he added. “We weren’t making any money and our cash was sitting idle, so we thought we should do something other than keep it in the bank.”
Many farmers save their working capital and buy farmland, but farmers of a certain age may want to diversify their portfolio. Mr. Shea said he is looking for other ways to manage capital and generate future passive income.
“I’ve invested my whole life in farms, but now I’m looking for something outside of farms. I’m resistant to stocks,” he explains. “I wanted to invest in something that felt real.
real estate. “
Shea is working with co-owner Mike Downey, who is based in Iowa. Next Generation Agriculture Advocatefocuses on transition planning and unique matching and coaching of non-family successors.
Downey and his wife also run Farm Raised, a group that identifies alternative and underperforming assets such as multifamily housing and helps farm investors and agricultural professionals become limited partners in actual real estate. Established Capital. These properties generate steady monthly income and pay cash distributions to investors.
“There are two areas in transition planning that are underserved for farmers: succession planning and supplemental off-farm income,” Downey says. more than dirt on the blog farmfutures.com. “Many farmers, in general, don’t have a lot of diversity. That’s why we launched Farm Raised Capital to help solve those problems.”
Two advantages
It turns out that investing in off-farm real estate has several benefits. Raising the funds to buy farmland can be a challenge for young farmers, but if you don’t mind a certain level of risk, syndicated real estate offers a way to earn faster and higher returns than farmland. I’ll give it to you.
“Historically, farmland value increases by 4% over time,” Downey said. “If you can double the value of your investment over five to 10 years, you’ll be able to earn a 15% to 20% return, which means you have more money to invest in your farmland.”
One disadvantage of farmland is that it cannot be depreciated, which is not the case with commercial real estate. “During my own discovery process, I realized that commercial real estate has strong tax benefits. For example, you can use paper losses to offset passive income in retirement. ”
This type of investment may offer a partial solution for farmers who are considering exiting the business but feel trapped by tax deferrals. Alternative investments offer a way to get off that treadmill and move your farm into the next generation more quickly.
“Some farmers have always had deductions as farmers, but if they lose that deduction, they have more income tax problems than inheritance tax,” Downey said.
How to use
A tax professional or engineer will conduct a cost segregation study. In the case of agricultural land, its activities evaluate fences, tiles, buildings, and even fertility. All of these things can be depreciated, but they only make up a small portion of the total value of the land.
For commercial real estate, the story is reversed. For example, a multifamily cost segregation study might place value on pools, parking, appliances, and the building itself. Much of it can be depreciated up front and not over several years.
Downey leverages relationships with real estate syndicators who provide critical analysis of potential investment properties. This is also an advantage for passive investors. These properties could be located anywhere in the country. Syndicators consider various factors to consider before investing.
“We look at their due diligence and stress test their underwriting, so you don’t have to go looking for an apartment building that you manage yourself,” Downey says. “Many people in the farming community don’t have the time or interest to do that.”
A syndicator organizes a group of people to pool their funds. Minimum investment is a minimum of $25,000 and a maximum of $500,000. As an investor, you become a limited partner in the entire property. Your shares may represent 1% or 2% of your total ownership.
This investment approach also has drawbacks. First, the money is tied up for a predetermined period of time. Secondly, there are risks and there is no guarantee of expected returns. Generally speaking, real estate is a reliable and predictable investment vehicle over the long term.
Looking for an apartment
Let’s say you invest $100,000 in an apartment complex. Immediately, he will be offered a tax benefit of $70,000 from $50,000 in the form of a Schedule K-1 document loss.
Each project has different profit goals. Some apartment complexes may have cash flow from day one. Another property might require a five-year plan to renovate the property, increase rents, and offer larger payments.
Finally, from sales.
Other properties may also focus on tax deductions. For example, oil and gas properties are unique within his IRS code. Instead of 50% to 70% depreciation, you get 80% to 90% depreciation, which can be used to offset active income as well as other passive income.
These attributes are factors to evaluate before investing. Alternative investments may or may not suit your financial goals. In any case, farm investors like John Shea don’t have to spend much time looking after alternative investments.
In fact, once you invest, you don’t need to spend any time on it at all.
“Historically, supplementary income sources have come from other enterprises associated with the farm, such as seeds, livestock, or part-time work, all of which take time,” concludes Downey. “It’s a truly passive investment and doesn’t take away your farm or family time.”