How Rich’s LLC Turned $30,000 into $200,000 — A Story About Brothers, Bubbles, and Prairie Dogs.

Dear Penny (and Mr. Othalafehu and Mr. Retirement Manifesto),

After my Retirement Plan post, Mr. O, specifically, asked about my LLC holdings. Happy to oblige. Here’s the story of how a $30,000 investment in farmland turned into more than $200,000. There are bunch of graphics and some stories from my neck of the woods.

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BROTHERS LLC

I’m going to start this story at the end, and then talk about the beginning, and then return full circle to the very end, like one of those annoying historical fiction novels that jumps between the past and the present. I’ll try to do this without being annoying. Go read or watch Julie and Julia for a barometer of this approach. If you can stomach it.

Careful readers of my Retirement Plan, like Mr. Manifesto, noticed that around 30% of my Net Worth is currently tied up in what we will call Brothers LLC (Limited Liability Company). Here’s my net worth pie chart, updated:

Rich’s Net Worth Pie. Click on image to enlarge.

Brothers LLC is like an investment club I’m in with my 2 brothers. More accurately, it’s me and Mrs. Rich and my brothers and their spouses. We all own our shares through our respective family living trusts (which I highly recommend for estate planning — more on this in a future post).

My brothers and I each bring unique contributions to our company.

  1. Brother 1 is a former doc and a visionary. He can afford to be a visionary because he made huge money as a doc. He owns 55%. The LLC was his idea, and most of our holdings have come through his connections.
  2. Brother 2 is a banker, he’s our numbers guy. He also makes big money, but he’s fairly conservative, as bankers can be. If he doesn’t like a deal, we usually pass. He owns 20%.
  3. Brother 3 is me. I’m the youngest. I bring creativity and comic relief and the occasional flash of insight. I own 25%.

The foundation of Brothers LLC is farmland. None of us are farmers anymore, but we farmed growing up and we come from a long line of wheat farmers. My ancestors worked the land in France before immigrating to Canada and the northern Midwest, USA. It’s here that I must introduce a seedy character named Grandpa Jack. Get it? Seedy?

That’s not his real name, but people called him that. And now, we go back.

Related: Rich’s Financial Origin Story: From Farm Boy To Theology Student To High Income Professional

GRANDPA JACK, NORTHERN MINNESOTA HILLBILLY

Grandpa Jack was a farmer who didn’t graduate from the 8th grade because, as he told the story, he was afraid of my grandmother. I didn’t get it, but I nodded when he told the story.

His whole life, he worked on the farm. Even in his 70s he would be fiddling around, fixing up old trucks, cussing about broken parts. His favorite was “Damnitalltohell” — properly said as one extended compound word. Honestly, I was afraid of the guy. Later on in high school, I told him I was going to start traveling to help people in other countries. His only question was, “When will you be back to the farm to work?” My grandma slipped me a card with $50 inside, and she wrote: “For your trip. Don’t tell Grandpa.”

Grandpa Jack had a falling out with my Dad, for various reasons, including the fact that when he retired he didn’t give Dad the land as he had promised. He made my Dad buy it in sections, full price.

In 2005, Grandpa Jack died, and true to form, he did not leave any land to my Dad, even though Dad had worked it for 40 years. Grandpa left land to his daughters (my aunts) and to a grandson (Brother 1). Other grandchildren received silver bars that Grandpa Jack had hidden in a woodpile in his backyard. I’m not kidding.

This is real farmland.

AUNTIE JUNE, NORTHERN MINNESOTA HILLBILLY

In 2008, my Auntie June, a chip off Jack’s block who had inherited 80 acres of land, was looking to sell. I have no idea why. Auntie June is a total mystery to me and I can’t believe we are related.

I just finished reading the excellent book Hillbilly Elegy (that you recommended, Penny). Grandpa Jack and Auntie June remind me of characters from that book. I’m not sure we have a good name for these people in Minnesota, rural folk who drink terrible beer and tell dirty jokes, and also shovel the sidewalk and wave to everyone they see. Imagine crossing a hillbilly with a character in the movie Fargo and stick them in Little House On The Prairie, and there you go.

Could we call them Prairie Dogs? I mean that with all respect.

Auntie June smokes like a chimney and carries dice in her purse, just in case anyone wants to gamble for quarters. And if you see Auntie June, you’re going to gamble for quarters. I’m guessing this habit has something to do with why she wanted to sell the land.

BROTHERLY VISION AND A DECISION

Like I said, Brother 1 is a visionary. After he inherited the farmland (151.5 acres), he immediately began pestering us to form a company and use the land as the basis for more investments. He could’ve done this himself, but he wanted the land to be a family asset and he also wanted to decrease his own risk. We ignored him at first.

But then he heard Auntie June was selling. So Brother 1 proposed that we pool our money to buy Auntie June’s land, and he would add it to his own land and give us a discount in the process. We would then have 231.5 acres to work with in an LLC.

The total cost to me would be $30,000 for a 20% share of the total. $30,000 was a lot of money to me in 2008. I was newly married, we were paying of Mrs. Rich’s student loans (totaling $30,000) and we were thinking of saving for a house.

We had to decide: house or LLC?

It was philosophical. Conventional wisdom says own a home. But we liked the idea of growing our investments and renting our residence. And I liked the idea of starting a family business with my brothers. So we scrapped together the money and BROTHERS LLC was born — from the ashes of Grandpa Jack’s grave and Auntie June’s cigarettes.

Chart reflects Iowa prices, but this is an example of farmland mania. Click on image to enlarge.

THE GREAT RECESSION AND THE FARMLAND BUBBLE

With my brother’s discount, our $30,000 was immediately worth $50,000. And much to our surprise, we had bought farmland just before land prices skyrocketed. In 2008, our land was worth around $1,150 per acre and rental prices were around $65 per acre, per year. A decent ROI of 5% or so. Then the Great Recession caused the Fed to lower interest rates, causing wheat and land prices to go nuts. Land prices tripled and rent prices doubled.

In 2010 and 2011, I started seeing articles about farmland in the NYT, WSJ, and USA Today. Not normal. By 2012, I was pounding the table with my brothers, telling them that we may never see prices like this again. Even my Dad, who loves to say, “God ain’t making more farmland,” was convinced to sell a section of land. That said, we didn’t want to sell ALL of it — it’s our family heritage and a unique asset. So Brothers LLC decided to sell the 80 acres we bought from Auntie June. And that’s how my $30,000 investment jumped to $186,000 in a flash.

As you can see on this chart, the value of our land went up 220% in 4 years and my investment went up right with it. In rural Minnesota, you just don’t see moves like this. It’s not New York, it’s the Prairie!

Rich’s share of the LLC from 2008-2012. Click on image to enlarge.

There was a bidding war and we got a great price. I think my profit after taxes and fees from the land sale was around $39,500. Instead of pocketing all the cash, I used $30k to purchase an additional 5% in the LLC from Brother 1. So, now I own 25%

DIVERSIFICATION AND LEVERAGE

The story of BROTHERS LLC after that is mostly a story about diversification and leverage.

In 2010, we diversified and made our first investment in commercial real estate, Building A. The investment amount was $100,000, more than we wanted to contribute. But it was a good deal, offered through Brother 1’s connections, so we contacted the bank in rural Minnesota, and the bank loaned us $100,000 without any hassle with the farmland as collateral. Farmland is rock solid, and rural banks know it. I think we have a $450,000 line of credit at the bank now.

In the personal finance world, leverage (aka using debt to acquire assets) is often a dirty word. My answer to that is “it depends.” It depends on the asset, on the terms of the debt, and on the income of the debtors. For us, it has worked out. By using leverage selectively and reinvesting our land / real estate profits, we bought shares in 3 additional commercial buildings to diversify our holdings. We’ve paid the debt down periodically, and ramped it up again opportunistically. Brother 2, the banker, handles the details.

Rich’s share of the LLC from 2012-today. Click on image to enlarge.

Mostly, the commercial building investments have been small but good deals, through the same RE connection. We partner with other investors and typically own between 15-30% of a building in our LLC. One of the buildings (Building B) shot up by 50% in 2 years, so it was sold for a nice profit.

You can see in the chart above that my LLC share (black line) looks rather flat since 2012. It’s somewhat deceiving. First, there are dips after a liquidity event (land or building sale) because taxes are paid on the gains. Second, the farmland bubble has been deflating. It may have bottomed around the end of 2015. Third, the yellow bar, distributions, represents money I’ve received from the LLC. That money is no longer in the company, but it was profit distributed to me and worth noting.

Finally, you’ll note another large investment in 2014, again using leverage. We invested $150,000 in a small business. My share is $37,500, and it has grown to $50,000. We’re starting to generate more cash, but I’m not sure how long we’ll invest in businesses. It has more upside than land, but It’s also more complicated and more risky, I’m learning.

Here’s the whole journey in one graph.

Rich’s share of the LLC, from formation to present. Click on image to enlarge.

BACK TO THE FUTURE

So this brings me back to where I started! From an initial $30,000 investment, today I have the following holdings, worth $200,100 (after debt, which is not pictured):

Click on image to enlarge.

I’m not exactly sure how much income we receive per year — it doesn’t all get distributed and there are taxes and insurance and other considerations. My estimate is that my share is growing by $10,000-$15,000 per year. I estimated in my retirement post that my share would be worth almost $550,000 in 15 years. Here’s what I hope it will look like as part of my overall financial plan:

Net worth projection for retirement. Click on image to enlarge.

I’m projecting the LLC will be a smaller percentage of my net worth in the future. Hopefully I’m wrong and it will continue to outperform.

LESSONS FROM A PRAIRIE DOG INVESTOR

We all have unique backgrounds and different types of opportunities for investing. I don’t know the first thing about franchises or marketing or blog monetization (Penny and Rich earnings to date: 98 cents, up from 96 last week). But I know farming, and I’m learning about real estate and small business. So here are some lessons I’ve learned on the Prairie.

  • Don’t discount the role of luck. I got lucky in several ways — my family had land, my brothers and I had money and connections, and we bought and sold with impeccable timing. Lots of luck!
  • Don’t discount the role of smart choices. There’s a reason that I’m writing this post and Auntie June isn’t.
  • Diversification is powerful. It’s nice to know my net worth doesn’t depend solely on the value of my house or the stock market. When there’s a chance to buy something other than stocks, like a hard asset, it’s worth considering.  
  • Be willing to question conventional wisdom. With conventional wisdom, we’d own a home right now. Maybe that’d be ok, but we rather like nomadic living, and we’re excited about the LLC.
  • Know when to sell / Don’t fall in love with an asset. We love investing in farmland, and bubbles are difficult to spot … BUT … price matters. Decades of rental income would not have outpaced the gains we got from selling at bubble prices. If we hadn’t sold at least a partial position, our LLC would be worth much less as farm prices deflated. This applies to all asset classes (hint, hint).
  • Find people you can trust. My brothers and I could not have done all of this alone — we needed family support and each other’s unique skills. Vision and connections (Brother 1), financial analysis (Brother 2), and the insight to call a bubble (me).

If you can find that mix of factors, you can invest almost anywhere. And if that doesn’t work … carry around some dice and some quarters. You never know!

You Betcha,

Rich

PS — I’m on Twitter! Not bad for a farm boy. Follow me at ‎@PennyandRich

13 Replies to “How Rich’s LLC Turned $30,000 into $200,000 — A Story About Brothers, Bubbles, and Prairie Dogs.”

  1. Rich, you had me rolling with your story of Grandpa Jack and Auntie June! You’ve got a gift with the written word, my friend. Also, a fascinating look at farmland as an investment, not a topic we often see in PF blogs. Great post, with great graphics. Congrats on your great success, I’m lovin’ your blog!

  2. This is my new favorite post. Holding farmland is a portfolio fantasy of mine. I think warren Buffet once said you could either have all the gold ever mined or all the farmland is America and that the farmland was the better deal by far.
    Thanks for this post. I think it is these unconventional paths to wealth that we need to see more of in our little corner of the internet.

    1. Thanks O — I’m lucky to have access to farmland as an investment, it’s difficult to manage without the local (often rural) connections, finding the right farmers to rent it and so on.

      I think there will be a time when I’ll be pushing for us to add more land to our holdings, but we’re not quite there yet. It’s a large capital commitment and bubble prices are still in the minds of many farmers. Appreciate the comment –R
      Rich @ pennyandrich.com recently posted…The Best Of Penny And Rich So Far — 6 Months Of Conversations Across The Income DivideMy Profile

  3. I really enjoyed this post. Your family history is interesting. You and your family did really well with the LLC. My wife’s grandfather was a chicken farmer in Pa and had many acres. It ended up getting turned in a housing development where we currently live. Every child and grandchild was left a 2 acre lot. There are a few lots left. I would like to buy this 3 acre lot behind me if I can get a family discount.
    Dave recently posted…Sirius XM: Getting Past NoMy Profile

    1. Thanks Dave. It’s funny, I always thought my family was devoid of culture and not very interesting compared to people with strong roots, like the Northeast or the South or whatever. But now I realize — with the help of the Fargo TV show — there’s a distinct culture up there.

      Appreciate the comment –R
      Rich @ pennyandrich.com recently posted…Are The Rich Hoarding The American Dream? An Examination Of Penny And Rich’s Path To Income Inequality.My Profile

    1. Thanks FTF. You’re correct, there are local farmers renting the land and growing crops, mostly wheat and barley and soybeans.

      Most of our family land, owned by us in the LLC and by my Dad, is rented by a large family farming operation. The economics of modern farming favors scale. You can make a good living if you farm a lot of land with new equipment — expensive tractors with GPS and so on. That said, a few sections are still farmed by a guy who does it single-handedly.
      Rich @ pennyandrich.com recently posted…Monthly Happiness Report: Rich Makes Sense Of Internet Commentary, His Cousin’s Controversy, And The Good Life –July 2017My Profile

  4. You and your brothers have had fantastic run and it looks like you guys are really smart about it.

    I have often though of setting something like this up with my own brothers, but they don’t have any money. They all pretty much live hand to mouth (paycheck to paycheck).

    I have been trying to rub off on them, but they just don’t seem interested.

    One day…

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