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