SW Financial Literacy
FSA joint financing. This USDA program has specific guidelines to be eligible, often needing to be a young or beginning producer. Through joint financing, you can get a portion of the loan through a traditional lender while FSA takes a second lien position to finance most or all the rest of the purchase. These interest rates are typically below market (1.50%-3.50%) and you can buy ground with $0 down payment.
The math: $900,000 purchase. $450,000 financed through your lender at today’s interest rate. $450,000 financed through FSA at 3.25% paid back over 40 years. This transaction needs $0 out of pocket to be completed.
As completed finance. You purchase 80 acres of combination ground for $400,000. 68 of those acres are dry land while the balance made up of trees, roads and waste. You plan to clean up the trees and be able to farm 77 acres. You also will be able to irrigate this property for next year, greatly increasing the value. Improvements will cost you around $80,000. Once the improvements are complete, the property will be worth $700,000. You could coordinate with your lender to have an ‘as completed’ appraisal done and finance 65% of the final value of the property ($700,000).
The math: $400,000 purchase plus $80,000 of improvements equals $480,000. $700,000 value after improvements X 65% = $455,000. This transaction now only needs $25,000 out of pocket to be completed.
1031 like-kind exchange. You buy 80 acres at $600,000 and get traditional financing for $390,000 over 15 years with a $210,000 down payment. After five years $89,000 principal has been paid down on your note. You sell the ground for $850,000 to reinvest into a property worth $1,150,000. The $1,150,000 financed at 65% gives you a new loan amount of $747,500.
The math: Sale of 80a nets you $339,000 equity (Appreciation $250,000 + debt paydown $89,000 = $339,000 equity). New property requires $402,500 down payment. $402,500 – $339,000 = Only $63,500 in cash needed for this new purchase.
Tap into equity. This is like the 1031 exchange model, instead you don’t sell the first farm. The same 80a in example #3 appreciates to $850,000 and has debt paydown of $89,000. Your loan to value on this property is now 35.41% ($301,000 loan balance/$850,000 land value = 35.41%). This time you buy 60 acres at $550,000 but combine the collateral of both properties.
The math: Combined collateral value is $1,400,000 X 65% = $910,000 total principal available against collateral – $301,000 for 80a loan = $609,000 available. You could possibly take out a loan for $59,000 above your purchase price, putting cash back into your pocket.
Equity investor. Buy a farm and get traditional financing at 65%. If you have sufficient cash flow on your operation, you could be eligible to finance another 15% through an equity investor taking a second lien position. This can come in handy for very large purchases or when you are trying to save cash for the next big transaction on the horizon.
The math: $2,000,000 purchase – $1,300,000 traditional financing – $300,000 equity investor = $400,000 down payment needed.
Seller carry. This option would take place when you are buying ground privately. The seller is ready to move on from the farm but isn’t needing all the cash up front. It is possible to make a small (or no) down payment for the property. Instead of paying the bank interest, the seller can benefit from ‘carrying’ the note themselves with interest income. The payback could take place over 10-20 years, or they may prefer a 5 year balloon when the prefer to complete the transaction.
The math: $2,000,000 purchase with $100,000 down payment. 5 year balloon at 5% termed out over 20 years = $153,000 annual payments to seller. After 5 years $1,586,175 is due to the seller. The property now appraises for $2,250,000 and you qualify for a loan of $1,462,500 with your lender. Only an additional $123,675 cash payment is needed to qualify for the financing.
Bring in a partner. The $1,200,000 property for sale is next to your acreage. You only have $200,000 cash available for the purchase. Your good friend owns a spray business and has been working with you for years. You form a 50/50 partnership and can rent the acres back from your partner. Now your purchase is just $600,000.
The math: $600,000 on 50% of the purchase X 65% = $390,000 loan and $210,000 down payment. Congratulations!
Combine multiple financing options (my example). For my farm purchases, I combined the first 3 on this list. My first purchase was $292,000 to acquire 68a of which only 43a were farmable dryland. This was financed with FSA’s 50/45/5 joint financing program needing just 5% down payment or $14,600. I spent $14,000 to increase farmable acres to 48a and sold the property 2 years later for $376,000 in a 1031 like-kind exchange. Through the sale of the 68a, I was able to pull out $84,600 in cash ($84,000 from the appreciated value -$14,000 improvement cost + $14,600 returned to me from my initial down payment). The new property bought was 112a dryland with a purchase price of $985,000. By using FSA joint financing again, the down payment needed this time was $49,250.
The math: $84,600 net pulled out from selling 68a – $49,250 downpayment on 112a purchase = I made $35,350 in CASH to buy 112a income producing crop ground. This is the power of creative financing in real estate.
Note: When you put less cash down and finance more of the purchase, this does have an impact on your cash flow. Make sure that you have sufficient profitability to move forward with higher levels of payments. All of these examples are estimates and exclude closing costs and other fees associated with the transaction.
Have a great day!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.