Farm land????

6454 Views 16 Replies 7 Participants Last post by furgy, Jul 13, 2009

csplice

Discussion Starter · Jun 20, 2009

Does any one have any background in farm land as an investment? From the little research I have done it seems to be worth looking into. I am focusing on vacant land, meaning no buildings like a house, barn, or storage shed. I am also focused on farmable landland, meaning less than 10% is bush, pond, or creeks.

When compared to a multi unit rental property of the same purchase price there are some obvious differences in the cash flows. It is this difference that is making it hard to choose the better path. A rental unit has a better and higher cash flow, but it also comes with more "issues". Farm land is simpler and easier to operate from the landlord position and might be worth sacraficing some income to save some headache.

Besides income potential there is capital appreciation. It is my opinion that farm land appreciates better than a rental unit. I have some data to back this opinion up but not enough to make a conclusion. Financial data aside farmable land today will still be farmable land in 20 years, a rental property today will need a lot of maintenance, and a well run municipality (city) to be the same property that it is today.

Any and all comments and questions are welcome.

1 - 17 of 17 Posts

leslie

· #2 · Jun 22, 2009

Cannot say I know anything about this. But doesn't it all hinge on the quality of farmer you get to rent it? And the contract wording that makes it in his interest to improve the quality of land?

I have heard that for capital gains, it is best to buy acreage that is on road corners - better access for eventual subdivision.

Bullseye

· #3 · Jun 22, 2009

I would think you'd have to pretty well versed in the farming business and the local business conditions, not just someone new to it all. Having a background in that would help immensely. Is that your situation?

I would also be very hesitant to count on appreciation, just as I am with tenant rental properties. I require positive cash flow first (at 100% financing, with provisions for vacancy and maint), price appreciation is a bonus.

Are there actually any land parcels where the rents provide a decent Cap rate? My understanding is that most such parcels are held by speculators, not investors, and that rental income is just used to offset some of the cost. They hold many properties for diversity, and 1 in 10 might take off in price and give them a decent overall return.

I do have some small background in this, with a family hobby farm. My understanding is that a bush property is generally a better investment. You can select log the valuable hardwoods to sell to artisans and fine manufacturers, and do more general logging for firewood. A family member does this currently, cuts, bags, and sells wood to sell to stores that serve campers in summer.

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csplice

Discussion Starter · #4 · Jun 22, 2009

@Leslie

Generally speaking it is in the farmersbest interest to properly maintain the land for the benifit of his crops.

I agree with your opinion about corner property for future development. My focus however is on land that will not be developed in my life time, or even my childrens life time.

@Bullseye

I grew up on a farm, but have always lived in the city. The cap rate is very close to break even generally speaking. Historical land has been a pretty good investment long term.

As for the logging/firewood aspect these are part of my equasions. It is my understanding that you can log a bush every 8-10 years for about 10-12K per logging. The firewood is a little more labour intensive the way you have described it which I'm sure get's a better return. There are a few people in the area that will pay to cut the less desirable tree's out of you property for firewood while leaving the better stuff for logging. For the bush lot to be worth it's trouble it would have to be about 10 acres or more.

Basicly what started me down this path was the realization that the family farm is disappearing. It is being replaced by large business that operate 100's of acres of land, some time even 1000's of acres. They can not buy all of the land they want for financial reason and are quite willing to rent what they can not buy.

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Retired at 31

· #5 · Jun 23, 2009

csplice said:
@Leslie
Basicly what started me down this path was the realization that the family farm is disappearing. It is being replaced by large business that operate 100's of acres of land, some time even 1000's of acres. They can not buy all of the land they want for financial reason and are quite willing to rent what they can not buy.

10,000's of thousands

100's of acres is a small family farm these days.

My parents stopped farming about 15 years ago. Sold the equipment, but kept the land. ROI these days is quite nice based on original purchase prices of the land, but some of that dates back to the mid 70's! Based on today's land prices, the ROI would be decent, but not spectacular. I'm sure there's huge variations in geography here though.

Good productive land is always in high demand and will rent for top dollar. You'll want to be very familiar with the area, but if you grew up on a farm, you probably have local knowledge.

csplice

Discussion Starter · #6 · Jun 23, 2009

Retired at 31 said:
Based on today's land prices, the ROI would be decent, but not spectacular.

I have come to the same conclusion with regards to renting the land. I think the value is in the share-cropping and the capital appreciation.

Share-cropping gives you "farmer" status with the CRA and makes you eligable for a lot of deductions and write-offs, including a 750K capital gains exemption.

Yes, it helps to be familiar with the area for the operation of the farm land, which I have. More important I think is to have a good accountant.

As a side track I just wanted to thank you for your story on MDJ. I have been following it with interest. Maybe you could add your succession plans for your parents farm land if there is any

Retired at 31

· #7 · Jun 23, 2009

csplice said:
As a side track I just wanted to thank you for your story on MDJ. I have been following it with interest. Maybe you could add your succession plans for your parents farm land if there is any

Not my land and no plans in place that I'm aware of. I don't need the land or the proceeds; neither does my brother. Dad mentioned something about leaving it to the grand children. They don't really need it either.

Hopefully it's not something I have to deal with for a long time!

csplice

Discussion Starter · #8 · Jun 24, 2009

Think of it more as a family tax strategy instead of a inheritance/death issue. It was my parents that brought this issue to my siblings and I. If your parents are in the situation that by selling their farm they will use up all of their capital gains exemption then it is the right time to do it, IMHO. This way the next generation can start working on thier exemptions. When done correctly everyone can benifit.

Retired at 31

· #9 · Jun 24, 2009

Getting way off topic now, but the parents have already taken their exemptions from divesting of another company. My brother bought some land from my grandpa a few years before he passed to avoid some of the hassles. As they age, we might look at doing something similar, but there's an emotional attachment to land that you've farmed. I don't think dad wants to deal with "giving up" his land...

csplice

Discussion Starter · #10 · Jun 25, 2009

Yes, we are drifting a little. It is very important to fully understand the consiquences of your actions before your jump in to a situation. Stocks, rental property, small businesses and farm land all have different characteristics in liquidity, purchase price, operating cost, operating revenue, sale price, and tax benifits when looked at from an investment perspective.

For example it was the tax issues and the selling issues that put an end to my research into a Florida rental property (seems to be a re-occuring topic on this board).

I appreciate your time and input to this topic. My purpose in this thread was to find other points of view that I might be missing in my assesment of farm land as an investment. As I stated earlier my research is not complete and to this point I have found no reasons not to pursue farm land as an investment for the long term.

Thanks again.

OhGreatGuru

· #11 · Jun 30, 2009

csplice said:
Does any one have any background in farm land as an investment? From the little research I have done it seems to be worth looking into. I am focusing on vacant land, meaning no buildings like a house, barn, or storage shed. I am also focused on farmable landland, meaning less than 10% is bush, pond, or creeks.

Besides income potential there is capital appreciation. It is my opinion that farm land appreciates better than a rental unit. I have some data to back this opinion up but not enough to make a conclusion. Financial data aside farmable land today will still be farmable land in 20 years, a rental property today will need a lot of maintenance, and a well run municipality (city) to be the same property that it is today.

Any and all comments and questions are welcome.

Just what our poor farmers need - more land speculators driving up the price of good farm land.

csplice

Discussion Starter · #12 · Jul 1, 2009

A farm is a business not a birth right and should be run accordingly.

I think you are confusing speculation with investment. The focus of this thread is to determine the potential of farm land as an on going business. Not as a quick flip for a subdivision or a mini mall.

Most farmers I know welcome the opportunity to rent/lease land as opposed to purchasing it out right. It frees up their capital to be used in other areas of their business.

OhGreatGuru

· #13 · Jul 1, 2009

csplice said:
A farm is a business not a birth right and should be run accordingly.

I don't recall saying otherwise.

csplice said:
I think you are confusing speculation with investment. The focus of this thread is to determine the potential of farm land as an on going business. Not as a quick flip for a subdivision or a mini mall.

Whether you buy it in hopes of redevelopment or in hopes of turning a profit by renting it out, it's still an infusion of outside investment capital that drives up the price. "Farm land" is not an "ongoing business", anymore than a vacant lot is. It is a real estate investment. It will be a good investment if:
a) you can rent it out a profitable rate of return; or,
b) you can realize a profitable capital gain somewhere down the road.

csplice said:
Most farmers I know welcome the opportunity to rent/lease land as opposed to purchasing it out right. It frees up their capital to be used in other areas of their business.

They may welcome the opportunity to rent, but only because it is so expensive to buy. I don't think it's in the best interests of our economy to turn our farmers back into share-croppers. (I suppose that one could argue that paying rent to some urban sybarite is no worse than having to pay a mortgage to some Fat-Cat Bank, but at least in the case of the mortgage the farmer is building equity and there is some end in sight to his serfdom.)

csplice

Discussion Starter · #14 · Jul 2, 2009

Dang! I had to google the word "sybarite", good one!

So we are in agreement on 2 issues here:

Farm land is a good investment if:
a) you can rent it out a profitable rate of return; or,
b) you can realize a profitable capital gain somewhere down the road.

And that paying rent to some urban sybarite is no worse than having to pay a mortgage to some Fat-Cat Bank. It may even be better for the farmer in certain situations.

coin purse

· #15 · Jul 6, 2009

Intersting query...

A lot of what you are asking depends entirely on where you are located or where you are looking at buying land. As some have mentioned already, trees might be better than cultivated land in certain areas...in other parts of the county the opposite is true.

From my experience, if you own land in a highly productive agricultural area, finding a farmer to rent it from you is not too difficult and it should be relatively easy to cover property taxes.

ps. first post...I'm happy to have found this site...looks like some good discussion!

csplice

Discussion Starter · #16 · Jul 12, 2009

Just for clarification...

Yes, I am considering land in a highly productive agricultural area.
And I am not worried about being able to rent the land for fair market value.

The big question is farm land as a long term investment. Is it a good allocation of capital? Would you consider it as the bond/low risk/income part of your portfolio and put more towards stocks if you owned farm land?

furgy

· #17 · Jul 13, 2009

OhGreatGuru said:
Just what our poor farmers need - more land speculators driving up the price of good farm land.

I live in a predominantly agricultural area , and I don't know of any "poor" farmers , they've all got it pretty good with all the tax breaks , farm incentive programs , etc.

OhGreatGuru said:
They may welcome the opportunity to rent, but only because it is so expensive to buy. I don't think it's in the best interests of our economy to turn our farmers back into share-croppers. (I suppose that one could argue that paying rent to some urban sybarite is no worse than having to pay a mortgage to some Fat-Cat Bank, but at least in the case of the mortgage the farmer is building equity and there is some end in sight to his serfdom.)

Renting of farmland is a great opportunity for others to try their hand at farming without having to break the bank and buy land , rent or lease it for a few years and if it doesn't work out just walk away.

It is very common to lease land in our area and large tracts of land within the ALR can be very hard to sell if one wants out.

If one person buys a large peice of land , say 200 acres or more , he can lease it out to a few people who want to farm on a smaller scale and could not afford the whole peice themselves , in that respect it my be a good thing and keep farms smaller and more diversified than all the big McFarms we are seeing emerge today , nothing more than chemically fed food factories.

I think it's a good idea , I would consider it low risk/income , but I would not allocate more into high risk stocks because of it.

I would still invest in REIT's.

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