Latest / Dollars In The Dirt / #056 - 4 Ways to Use Farm Equity and Stop It Going To Waste

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#056 - 4 Ways to Use Farm Equity and Stop It Going To Waste · Dollars In The Dirt

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  Your farm can be worth more than ever and still leave you short of cash. Most
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  producers think a rising property value means they've got money
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  sitting there ready to use. After helping hundreds of farmers secure
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  over a billion dollars in finance, I can tell you that equity
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  alone only helps when the debt, the cash flow
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  and the purpose all stack up. So in this video, I'm going to
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  show you how to look at your equity, whether you're considering another
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  farm, a business, a commercial property or shares, and
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  make a call without putting unnecessary pressure on the farm. A
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  property can be worth a lot more than it was 10 years ago. You've paid debt
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  down. And there have been some strong sales around the
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  district. You look at your balance sheet and think there's plenty there. And there
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  may be. But net worth, equity and cash in the bank
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  are three different things. Your net worth is what you own, less
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  what you owe. Equity is the gap between the property value and
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  the debt secured against it. And cash in the bank is
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  what pays the bills next week. So we've got a grazing property in
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  Western Queensland. It's worth $8 million. You owe $3 million
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  and that doesn't mean you've got $5 million ready to spend. A
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  lender still needs to look at the security, the debt already in place, the
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  repayment history and what the business can carry from here. You
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  need to look at the buffer as well. That buffer gives the business room
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  if the season turns. prices soften or the right opportunity
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  comes up later. Once you borrow against it, it stops being paper
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  equity. It becomes debt that needs to be serviced. The
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  first scenario most people think about is property. Maybe it's
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  a neighbouring block, maybe it's another farm that fits the business. That's
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  where I'll start. Then we'll look at the other places people sometimes want
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  to use their equity. Because a business, a commercial property and
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  shares all create a very different conversation. If
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  you're looking at using equity for a property purchase or business growth, get
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  clear on what the new debt needs to do before you commit. Book
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  a free call using the link in the description and we can look at the security, the
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  cash flow timing and how the deal needs to be put to the lenders. So
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  let's start with the block next door coming up for sale. You know the country,
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  it joins your home property, it gives you better access to water and
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  it lets you use the yards, machinery and labour that you've already got. It
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  can be a very different proposition from buying a stand-alone place somewhere else.
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  The joining country might be generally make the existing operation stronger
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  and more scalable. But you still need to look past the land value. If
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  it needs fencing and water, that's money going out before it gives
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  much back. If you need to build stock numbers that income may take time to
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  come through and the larger debt starts straight away. So practically
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  look at the full purchase, the land debt, the capital you need
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  to get the place operating property and the working capital that stays in
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  the home business while all that happens. The property may support the
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  security side of the deal, but the bigger question is whether the farm
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  can carry the repayments in an ordinary year. And that's not a perfect year,
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  an ordinary one. You don't want to put every dollar of equity into the
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  deposit and leave nothing for stock, repairs or the next
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  poor season. That's the first property scenario, but it's not
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  the only reason people look at using their equity in the farm. Maybe
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  the opportunity is a business outside the farm. It could be a
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  transport business, a tyre business, or it could be a rural supply business,
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  or it could be something that the family already knows well and wants to buy into. The
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  farm may have the equities to support the purchase, but the business
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  still has to stand on its own feet. You need to understand where the income comes
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  from, how consistent it's been, how much cash needs to stay in
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  for staff, stock, equipment and working capital, after
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  you own it and a business can look profitable on a set of accounts and
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  still need a fair bit of cash moving through it every month. That's different from
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  buying land that may be held over for a long period. If
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  you use your farm security to buy a business, the farm is taking
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  on some of the business risk as well. Your accountant needs to
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  be involved in the financial side of the purchase and your solicitor needs
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  to be involved in the purchase documents and ownership structure. From the
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  finance side of things, I'm looking at the security, the lending structure, the
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  timing of repayments, and whether the farm and the new business can
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  carry the debt together. Before you use farm equity to buy
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  a business, ask yourself, does the business produce enough cash
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  after its own wages, stock and running costs? And if it has a slow period,
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  Can the farm still carry the repayments? And have you had the
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  accounts, purchase terms and ownership structure properly
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  reviewed? Next up is a commercial property purchase. Now
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  this can look appealing because there may be rent coming in, but
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  rent isn't the same as farm income. You
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  need to understand the lease, how long the tenant is committed for, who
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  pays the outgoings, and what happens if the property isn't producing rent
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  for a period. Say you buy a shed, shopfront, industrial property
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  using equity in your farm. The rent might help service the debt.
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  But the family business needs to still be able to carry the loan if the
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  tenant leaves, the property needs work or the rent
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  takes time to come in. That's where the cash flow side of things matter. Don't
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  just look at the rent from day one. You need to allow for vacancy, repairs,
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  rates, insurance and the timing of those costs. If
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  the farm is the main security, a lender will look at the farm cash
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  flow as well as the commercial property income. Commercial property may
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  suit some people, but whether it suits you depends on the property, the
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  tenant, the price, the lease and the wider family position.
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  That's something to work through with your accountant, solicitor and advisors
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  before using the farm to support it. Before you use your farm equity
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  for a commercial property purchase, ask yourself, how secure is
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  the rent and what happens if the lease ends or the tenant leaves? Can
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  the farm carry the loan and property costs through a vacancy? And
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  what costs will still be there even if the rent stops coming in?
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  Then there's shares, and this is different again. They don't give
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  the lender the same kind of security as another farm or a commercial building,
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  and their value can move around quickly. Some producers look at
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  shares because they want to diversify some of their family wealth away from
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  the farm. That can be a reasonable thing to explore, but using debt
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  secured against the farm to buy shares is a different risk from
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  using debt to buy a block that joins your property. The debt is still sitting
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  against the farm, the interest still needs to be serviced, and the
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  shares may move in value without creating the cash flow to
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  cover the debt. I'm not here to tell you whether shares are the right investment or
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  not. That's a conversation for a licensed advisor with your accountant
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  and solicitor there where needed. What I can say is don't treat farm
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  equity like free money. Understand the debt being created and
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  what cash flow is paying the interest and what the outcome would mean for
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  the farm if the investment doesn't perform how you hoped. Before
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  you borrow against the farm to buy shares, ask yourself this. What
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  job are the shares meant to do in the family's overall position? What
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  cash flow is going to pay the interest while you hold them? And
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  if the shares fall in value, can the farm still carry the debt without
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  pressure? Whether the equity is going to another farm, a business, a
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  commercial property or shares, the farm still has to carry the debt
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  secured against it. Equity doesn't pay interest, cash flow does.
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  So get a realistic forecast in front of you. When do you sell
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  cattle? What is already due before the money comes in? And
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  then add the new commitment to the picture. You're not trying to prove the deal works
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  if everything goes right. You're trying to see whether the business can carry it
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  if the season is average and the new investment takes longer to
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  do what you expect. That's where the buffer matters. Sometimes using
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  equity makes sense. Sometimes keeping it in reserve is
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  the better decision. A strong property position doesn't mean that
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  you need to borrow against every dollar in it. If you decide to move ahead
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  with business farm growth or a business deal, a lender needs to
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  understand the full transaction. not just the value of the farm. They
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  need to see what you're buying, why you're buying it, how the debt
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  is structured, and how the repayments will be met. They
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  need to see why you're buying it, how the debt is structured, and how
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  the repayment will be met. They'll want to understand what security is
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  already tied up, what is being offered, and how much room is left in
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  the business after the new debt goes in. A good lender pack
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  puts the real position on the table. If the purchase takes time before
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  it produces income, you need to explain it. And if there's a tight part
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  of the cash flow, explain how it's going to be managed. That gives the
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  lender something they can properly assess. And of course, if
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  you'd like to present it properly and with the highest chance of approval, you
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  need experts in your corner. There's a link in the description below where
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  we can book a free call with my team to see how we might be able to help you. Thanks