Dec 302012
 

We sometimes hear about how Canada’s debt is over $600 billion, and it’s going to hit new highs in the next couple of years, and how it’s so unfair to leave all this massive debt to future generations. But I don’t think it’s that big of a deal. I’m sure in the 1980′s when our parents were younger, they were scared to think about having to pay back around $300 billion of national debt. But 3 decades later, they turned out just fine, well most of them anyway. Canada turned out okay :D and the debt is STILL there, in fact, the country’s debt has pretty much doubled during that time.

Canadian national debt

Based on CPI data from Stats Can, most things costs twice as much today as they did 25 years ago. You can use calculators like this one to see how much $100 basket of goods in 1980 would cost in 2005, for example. And between 1980 and 2005, the median income of all economic families of two or more people increased 11.1% in 2005 constant dollars. That means most household incomes have beat inflation over time.

So if we’re making twice as much money, and our assets (eg: houses, stocks, etc) are also worth twice as much, and we’re spending twice as much on stuff, then relatively speaking if our debt is now also twice as high ($600 billion), did it really increase from before in real economic terms? The only thing that’s changed is the money supply we have in the system. Every dollar back in the 1980s only has the same effective value as 50 cents today :0) So that’s why our national debt may look bigger, but may not feel bigger.

I don’t see the problem of handing down all this debt to our future children either because they’re just going to do the same to THEIR children. Why not? Every other generation before them has gotten away with it lol :0)  But what’s good about our national debt is that most of it’s owned by Canadians.  Mutual funds, pension funds, and even the CPP is invested in our national debt. For example OMERS, a company that manages and invests people’s retirement money in Ontario, might have bought $1 million of Canadian debt. That would mean they lent the federal government $1 million. So the beneficiaries of this $1 million once the debt is repaid is the hard working municipal employees of Ontario. About 75% of the $600 billion debt is owed back to Canadians this way. So our net debt to people in other countries is only a fraction of the total number.

But if anyone is still concerned about government debt and wants to feel accountable for racking up so much IOUs, luckily there is a way you can pay your fair share of our national debt. There are about 35 million people in Canada, so on average each person’s share of the national debt is about $17,000. That means you can just buy federal debt, such as Canadian Savings Bonds, either through your bank or a trusted broker, and the government of Canada will literally owe you $17,000, or however much you buy. In other words, you will become one of the many beneficiaries of that $600 national debt :D By owning what you owe, you essentially don’t owe anything. As far as the national debt is concerned, you will be debt free :0) However I am not certain this logic is sound because you would be paying off debt with more debt, haha. But hey, that’s the kind of world we live in (^v^)

Dec 282012
 

It seems like other bloggers are doing their year end goals reviews so here’s mine. In January I set out to accomplish 6 goals by the end of this year. Let’s see how I did.

1) Make at least $4,000 more than last year.

  • (Pass) Got a small raise at work. But the biggest factor to this number is my growing dividend income. Pays off to invest as early as possible.

2) Put $10,000 into my retirement accounts.

  • (Pass) Took out a $10,000 RRSP loan from my bank earlier this year and threw that into my registered trading account at TD.

3) Put $5,000 into my TFSA.

  • (Fail) I only invested $3,000 into my TFSA this year because I ran out of funds after saving to buy a property. If only TFSA loans existed at my bank  :O(

4) Put $25,000 towards other investments.

  • (Pass) Bought a farm earlier this month with a $37,500 down payment. 

5) Have a six-figure investment portfolio.

  • (Fail) The net value of all my investments including RRSP, TFSA, farmland equity, and non-registered funds, comes out to only $97,800, so close (>_<) Off by 2.2%

6) Increase net worth by $40,000

  • (Fail) Right now I’m only worth about $37,000 more than this time last year. Off by $3,000. Unless we see a huge bounce in the stock market on Monday, it is very unlikely I will hit the $40,000 mark.

Overall I did okay. Three out of six is still 50% so that’s a pass in my books :0) Hope everyone else did well with their goals too.

setting goals for myself

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Random Useless Fact:  Student loans are usually forgiven if the borrower dies or becomes disabled  So it’s safe to marry someone who is deep in student loan debt because you will not be responsible for the remaining balance if something were to happen to your spouse. Some exceptions apply, for example, if you happen to co-sign for your partner’s loan.

Dec 262012
 
durum farm

Earlier this year I blogged about why I was interested about farmland investing. And earlier this month I posted about how I was really close to buying my first farm. Well drum roll please because earlier this week I officially became a farm owner ;) That doesn’t mean I’m a farmer though. I still live in the city, but I’m the landlord of a farm in eastern Saskatchewan. With farmland prices growing at double digit rates in the United States, Australia, United Kingdom, and pretty much all over the world, Canada is certainly no exception to the global trend :0)  Buying farmland as a long term investment is not for everyone, but if you’re interested to learn about the business, please read on (*^_^*)

 About my Farm

Saskatchewan is divided up into small squares called rural municipalities (RMs) Each RM has a number and a name. My farm is in the RM of Sliding Hills (RM #273) Below is a map of Saskatchewan.

lots of farms in saskatchewan

And here’s a close up shot of the RM

farm squares

My farm is used for agricultural purposes to grow grains (wheat, barley, canola, etc) There are no buildings on the land. It’s in the black soil territory of Saskatchewan, the best kind :) Total area of the land I bought is 160 acres, or 1 quarter section. That’s about 7 million square feet. 135 acres is cultivated, and the remaining 25 are bush or slough.

my new farm in saskatchewan

 

Buying Procedure

Buying farmland is similar to buying a house. I get emails from my realtor periodically about new listings. I also went to the mls.ca website and filtered for “Agriculture” and searched for listings based on my price range. Super easy to do. Eventually I came across the following listing. Except it wasn’t sold at that time yet.

farm listing details

The seller wanted $167,000. I offered $145,000, to which he counter offered with $150,000. And that’s the final price we agreed on. I think it was a pretty good deal (works out to $937.50 per acre) because when my bank did their own assessment of the land they valued it at $154,500 so according to my bank, technically I’ve made $4,500 on my investment already :0) The crop insurance rating of my farm is an “F” meaning it’s Fantastic :D Haha. Just kidding. All farmland has a letter grade based on it’s soil quality, ability to hold water, etc. The better the land the better the grade. F is pretty high up there :D You might see a C or E but they are super rare and go for a much higher premium :)

farm offer

After I removed my subjects on the purchase agreement I found a lawyer in Saskatchewan for all the legal stuff, and went to my bank to get financing. TD requires a 25% down payment and lent me 75% at 3.89% fixed rate for a 1 year term. Took a Prt Scr of my account details below. Total lawyer and bank fees: about $2,500.

farm loan

 Rental Income

Luckily there was already someone renting the land from the seller when I bought it. I talked with this farmer and he said he is interested to continue farming there. So we signed a 2 year agreement where he pays me $37.50 per cultivated acre of land every year. Right now there is 135 cultivated acres so I will be paid $5062.50 per year. That represents about 3.4% return on the value of the land with no operational risk to me ;) Payment is to be made twice a year, half of it when he seeds in spring and the remaining half is paid when he harvests in the fall. Pretty typical rental agreement. Anyone can download these lease templates from the government of Saskatchewan website.

leasing out the farm land to a farmer

Behind the Numbers

Now to tackle the ultimate question. Does this investment make sense from a financial point of view? Let’s go through the numbers.

First, breaking down the cost of $150,000. As mentioned earlier, I needed to come up with a 25% down payment, or $37,500. Notice how I haven’t been blogging about the stock market much lately? That’s because I didn’t buy any new stocks since July. I started researching about farmland back in the summer and decided to start saving as much as possible. I had saved $10,000 in my bank account by the time I bought this farm.  I had also mentioned I sold about $10,000 worth of stocks in September. So that’s $20,000. The remaining $17,500 I borrowed from my line of credit.

Downpayment

  • $10,000 Savings
  • $10,000 Procedes from selling stocks
  • $17,500 Line of Credit at 5.25% floating
  • Total = $37,500

Farm Loan

  • $112,500 loan amortized over 25 years, currently at 3.89%
  • Total = $112,500

Total amount = ($37,500 + $112,500) = $150,000

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Next, let’s compare the income vs cost of owning. This will tell us whether I’m making money or losing money.

Revenues:

  • Rent = $37.5 x 135 acres = $5062.50
  • Total Revenues = $5062.50 / yr

Expenses:

  • TD Farm Loan: $112,500 at 3.89% interest rate = $4376.25
  • Line of Credit: $17,500 at 5.25% interest rate = $918.75
  • Property Tax: $475
  • Total Expenses: $5770 / yr

Net Income/Loss:

  • Net Loss = $707.50 

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Not sure if that’s the proper way to do a balance sheet. Lol, I’m obviously not an accountant :P But basically I’m paying more than $700 out of my own pocket every year. I’m not surprised though. If you think about it, I’m really only putting down $20,000 of my own hard earned money which is about 13% of the land’s entire value.  The remaining balance is financed one way or another, we’re talking about serious leverage here. This is what’s known in the mortgage industry as a high ratio loan, lol. Some readers might think I must be high on paint thinner. What kind of loony investor would put $20,000 of his own money into something that clearly will give him a negative return! He would be better off putting that money under his bed. He should at least save enough for a proper down payment, and not rely on his credit line.

I agree that the conventional way of analyzing cashflow would label my farm purchase as a bad decision. However many of my investment ideas are anything but conventional, and this is yet another example :P Despite losing $707.50 a year, I still think this is a good investment. I have 4 reasons for this.

1)  The bigger picture
In Chess we sometimes have to sacrifice pawns in order to win the game. In the game of investing, a short term loss is sometimes a necessary part of the longer term strategy. A lot of businesses are not solvent at first but over time they can grow to become very profitable. Farmland is such that investors need to have a long term view of the situation. You cannot buy and flip farms for a profit like you can with houses. I may be losing money now, but the entire loan is amortized over 25 years. And in the second year I will have paid off a portion of my principle, which means I’ll be paying less interest than today. I will probably break even some time in 2014. So for the majority of the amortization period I WILL be making a profit, just not right now.

2)Rent/Income to grow over time
This one is pretty self explanatory.

3) Capital Appreciation
Because farmland tends to hold its value over time we can assume with relative certainty that my farmland will grow in value over the next decade or so if we continue to have inflation. In fact, historically farmland prices have pretty much consistently beat inflation because the global farmland supply is shrinking, at the same time demand is growing.  Just to be on the conservative side, let’s assume farmland prices in Canada will increase by only 1% to 2% on average over the next 10 years. Even so, that means by next year my farmland will be worth $1,500 to $3,000 more (1% to 2% of this year’s purchase price of $150,000) That is more than the $707.50 I lose in my first year of operations. Below are what returns will be given 3 likely scenarios of different appreciation amounts.

Initial Investment $20,000 $20,000 $20,000
Price of Farm $150,000 $150,000 $150,000
If Farm Appreciates by 1.0% 1.5% 2.0%
Farm will be worth an additional $1,500 $2,250 $3,000
Net loss from operations $707.50 $707.50 $707.50
Total gain $792.50 $1,542.50 $2,292.50
Net Return on Investment 4.0% 7.7% 11.5%

Those returns aren’t great, but they’re not that bad either I think.  A classic example of sacrificing income, for wealth, which is good, because realized wealth (capital gain) is taxed less than realized income anyway :D

4) Inflation Hedge
With all the money printed by the Fed, there are some people who think we might see inflation reaching 3% or higher in the future.  Remember in 2011 when everything from food to gas appeared to have gotten really expensive? That’s because the inflation rate in 2011 was 2.9%. During that same year, the average price of farmland in Canada increased by 14.3%! I missed out that time but there is NO WAY I’m going to miss out on another opportunity like that (>_<)

D:DCIM100DICAMDSCI0003.JPG

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farm land price increaseThose are my 4 reasons why I purchase the farm despite being cash flow negative :)  I choose to assume a modest 1 to 2 percent growth rate so even if prices fall next year my long term view should give me plenty of time to recover. But what if we used some actual numbers, some real data! To the right is a chart that shows how much farmland prices have appreciated over the last 5 years. Source: FCC

Holy macaroni (o_o) those numbers are much higher than the 1%-2% annual growth rate I’ve predicted. Longer term data show similar results with farmland increasing double digits per yer on average over the last 10 or 20 years. If I make 4% return on my investment when my land goes up just 1 percent in value, imagine what my ROI will be if my farmland continues to appreciate next year like it has been doing in the last 5?

farm price grow surprise

 

 

Final Thoughts

As with any investment, past performance is not an accurate indicator of future gains. The boom in global farmland prices will not last forever and there are many risks in the agricultural business. But I believe the potential for profit far outweighs those risks, especially if one has a long term investment view. According to a study by Enquirica Research, Canadian farmland has seen a 10.6 per cent increase in returns over the past 10 years, compared with 3.8 per cent for the Toronto Stock Exchange Index. I don’t believe farmland is a better investment than the stock market. The truth is nobody knows what the price of farmland will do next year. But I already have over $100,000 in stocks, so I’m just looking for ways to diversify my investments. Will my new farm be a good investment or did I just make a big mistake? We’ll just have to wait and find out (~_~)

 

farm land pun long post

Sorry for the long post :P

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Follow up comment: All information above was posted in December 2012. Months later the farmland value report came out and Canada’s farmland increased 19% :D Wow, the realty turned out to be much better than the 1% or 2% I expected. See my post about how this investment has been paying off so far. 

I also wrote a FAQ for how to draft up lease agreements, rental rates, free lease templates, etc

(edited on May 31st, 2013)

Dec 252012
 

Let’s spend this day not thinking about money and just be mindful of those less fortunate, be grateful of the stuff and people we have, and give thanks that the world didn’t end on the 21st like some have predicted :D

Happy holidays and seasons greetings :0)

Merry christmas

Dec 222012
 

The average value of farmland in Saskatchewan increased by 9.1% during the first half of 2012 according to Farm Credit Canada. Annualized that’s 18.2% growth per year. I heard about farmland being a good long term investment at the beginning of this year but had no idea the momentum would continue to be so strong despite all the negative economic news we see in the media. But it actually makes sense when I thought about it more. As a relatively safe asset class, farmland appeals to all types of investors from those looking for income, to those looking for capital appreciation, to those looking for something solid to invest in that they know won’t go to zero no matter how much money the Fed prints. On average national price of farmland has grown about 9% per year since 2006. And from a longer perspective, from 1972 to 2003 it has grown by 9.4% a year on average.

Usually when something appear too good to be true, it probably is. But nevertheless I was intrigued by this seemingly unstoppable hot commodity. So earlier this year I took a trip to Saskatchewan to do some research. After speaking to many farmers, regulators, lawyers and realtors, I concluded that it was afterall a really compelling investment opportunity, so I started to look through some listings. In October I put in an offer for a piece of land in eastern Saskatchewan. There was some back and forth on the price but the deal is now almost complete.  Later this month I will become the proud owner of this productive farmland below. My realtor took this picture as I wasn’t able to be there.

farmland update

This is a 1 quarter, highly productive grain land located about 30 minutes drive N.E. of Yorkton, SK. How big is 1 quarter? It’s a square about 805 meters on all 4 sides. Or roughly 650,000 square meters. Of course nobody measures farmland in meters squared so that’s why we use quarters instead :0) Anyway, if you don’t like numbers, here’s a visual representation of the farm’s size. I’ve added some popular frames of reference for comparison purposes…. (sorry US readers, I’m getting all metric on you)

Farmland Update

It might seem big, but another way to describe the size is that it will take you roughly 10 minutes to walk along one edge, or 14 minutes to walk diagonally from one corner to the opposite :0) so it’s not THAT big right ;) This is actually the smallest piece of farmland you can buy in most cases.

The purchase price was $150,000. I have made a 25% down payment and financed the remaining balance. First loan payment should start in Jan, 2013.  Most of the paperwork for this purchase deal is already done. It just needs to go through land title which my lawyer is helping me do, and I should be the new owner of a farm early next week. Just in time for the holidays :D Sometimes I get accused of being too frugal, well this year I’m buying myself a Christmas present worth $150,000. Oh I shouldn’t have (*^_^*) But it’s okay to splurge once in awhile heh?

farmland update

I’m not going to quit my day job and go become a farmer any time soon. So I plan to rent out the land. I have a tentative 2 year lease agreement with someone who wants to use my land to grow his crops. The return from rental income isn’t as profitable as renting condos or houses, but that’s offset by the money you save on the cost of owning because there’s no strata fees (HOA), no yard to maintain or roof to fix, no building insurance  (because there is no building lol) and the property tax is super cheap. Being a farm landlord is one of the easiest jobs there is (^_^) The rent will most likely return 3% to 4% on the $150,000 value of the farm. However the real money making opportunity in farmland for me is the capital appreciation later down the road :0) Even if Saskatchewan farm prices increase in the next 10 years at just half the rate it has done historically, I will still be making over $5000 every year of paper money by doing basically nothing :0) I couldn’t stand around any longer and continue to miss out like I have in the past few years. So I’m finally getting in on the action :D

This post is just a farmland update on my progress so far, but shortly after the deal finalizes I will have another article up with proper details about my farm’s soil quality, any weather risks, all the financial details, and of course how anyone can go about buying their own farmland ^_^

Today I will do what others won’t, so tomorrow I can accomplish what others can’t.”  - Jerry Rice