(Agricultural) Equity to Managed Funds

I am trying to help my father-in-law save the farm (literally).

This is a classic case of equity rich but servicability broke.

We do not want to simply sell up, since this is a fantastic fourth generation farm in a beautiful part of the world. Also, since the property has recently been mentioned (indirectly) in several of the property investment magazines, we believe there is considerable capital growth in the land.

We need advice on how to establish a line of credit against the farm in order to invest in some income producing managed funds in order to finance moderate living expenses.

The difficulty as I perceive it is that, unlike the rent of an IP, the future income of the MFs is not taken into account when calculating the servicability of the loan. Given there is only a small income available at the moment, I think we may have trouble establishing the loan.

The property is totally debt free. There has never been a mortgage over the property.

A friendly RE agent has valued the property at about $1m, but this would go up to $2.5+m if the current sub divisions where completed.

My rough calculations suggest that we need to set up an LOC for $300K to comfortably produce an disposable income of $50k pa.

Can anybody advise us or point us in the right direction to a bank, applicable documentation, a specialised broker or anything....?

 

With between 1m and 2.5m equity you should have no problem securing a small line of credit against the property. Talk to a couple of mortgage brokers about low/no doc loans.

Your father-in-law should get some financial advice for his circumstances, but how about a concept like this:

Say the property is worth $1m. Get a line of credit against it for say $800k set up. BUT don't panic, it ain't all going to get used.

Figure out what say 5 years' interest at say 9% will cost (5 x $72k = $360k). That leaves say $400k to play with.

Put that $400k into a high yielding managed fund/s, LPTs and or some solid high yielding blue chip shares.

Say those funds/shares generate a return of 11% that's an income of $44k against an interest cost of $36k. So net return is $8k. Maybe it's not a lot, but there may be:

1) franking credits on distributions
2) some tax deferred income from LPTs
AND the interest on the borrowings should be tax deductible.

You've also, at this level of utilisation of the LOC also got not 5 years but 10 years interest covered (on that assumption of 9% interest - current rates below 8%).

Figure out yourself how big the upside could be if instead of an 11% return the funds/shares generate say 15% or even 20%+ (which plenty of funds have done in recent years).

Of course there's risk that the funds/shares will underpeform your cost of funding (i.e. 9% here) but you've got say up to 10 years interest covered to weather the storm.

What's the opportunity cost of doing nothing?

Ultimately your FIL will have to take a path which he's comfortable with...but with some financial engineering to optimise use of his lazy equity there could be a substantial income generated without having to sell the farm.

Good luck with it.

Cheers
N.

 

I've been waiting to see what someone would respond to this. Hmmm, good food for thought there Nigel.