Why Off-Farm Investment Matters in Succession Planning
At Sprout Agribusiness, we know that succession becomes far more manageable when farming families have access to additional assets. These assets create flexibility, allowing the current generation to step back from the business while providing options for compensation to non-working family members. One avenue we’re increasingly seeing our clients explore is off-farm investment, particularly in commercial property.
While there’s always a case to be made for sticking to what you know, diversification, when done prudently, can build long-term wealth and resilience. Especially as land prices have risen and productivity margins have tightened across mixed farming businesses (particularly in southern Australia), commercial property has emerged as a popular option. Many of our most progressive clients are choosing hard “bricks and mortar” assets over more volatile options like the stock market.
Let’s walk through an example of how a client might use existing equity in their rural property to purchase a commercial property with strategic debt funding support.
Client Scenario: Purchasing a Commercial Property Using Farm Equity
The Background
A client owns a rural property valued at $15 million, with only $3 million in existing debt, leaving significant equity available for investment.
During a strategic planning session with Sprout Agribusiness, the client identifies a goal of securing off-farm income to support retirement and long-term succession. With a 10–20 year outlook in mind, they decide to invest in a commercial property that offers solid returns.
The Investment
The client engages a professional to source a commercial property in a high-growth area. The chosen asset is valued at $6.5 million, with a net yield of 7% (after management fees and holding costs), equating to an annual net income of $455,000.
Sprout Agribusiness provides tailored debt advisory, helping the client leverage their existing farm equity to fund the purchase.
The Funding Structure
- Borrow $6.5 million at 5.5% interest-only
- Annual interest cost = $357,500
- Net rental income = $455,000
- Excess rental income is used to pay down the loan principal
- Acquisition costs (e.g., stamp duty) are paid from cash reserves
Loan-to-Value (LVR) Snapshot
- Total asset base = $21.5 million ($15M farm + $6.5M commercial)
- Total lending = $9.5 million
- Combined LVR = 44.1%
Understanding Commercial Lending Parameters
- Commercial lending is often structured as interest-only, which suits long-term cashflow planning.
- Depending on lease strength and the borrower’s financial position, LVRs can reach up to 70%.
- The strength and duration of tenant leases significantly influence the lending criteria.
Long-Term Benefits of Commercial Investment
- Capital Growth: Over time, property values may increase in line with rental yield growth and CPI-linked rent reviews.
- Decoupling the Debt: As the loan is paid down, the commercial debt can eventually be removed from the farm’s balance sheet, freeing up the original rural asset.
- Income Stream: Upon full repayment, the commercial property can offer a secure income stream in retirement or support future family needs.
Final Thoughts
At Sprout, we believe diversification is about control, not risk. When executed with sound planning, the right professional support, and a clear long-term strategy, investing in commercial property using existing farm equity can strengthen both the family balance sheet and your succession plan.
If you’re interested in exploring how this could work for your business, reach out to the Sprout Agribusiness team today.
