Dec 262012
 
durum wheat farm farmland investing

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 more 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 😀 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 😀 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 purchase price = ($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 😛 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 like 20% or higher, 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 😛 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 by1.0%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 Investment4.0%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 growth, which is good, because realized wealth (capital gain) is taxed less than realized income anyway 😀

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% increase in returns over the past 10 years, compared with 3.8% 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 😛

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[Edit June 2013] All information above was posted in December 2012. Months later the farmland value report came out and Canada’s farmland increased 19% in 2012 😀 Wow, the reality of land value appreciation turned out to be much better than the 1% or 2% I was expecting. See my post about how this investment has been paying off so far. This makes me want to buy another piece of farmland!

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

[Edit June 2014] Okay. In 2013 I purchased another farm for $172,500 with a $20,000 down payment. Now I have 2 farms, yay! According to FCC during 2013 Saskatchewan farmland values increased 28.5%. That means my first farm purchased in 2012 for $150,000 is now worth more than $200,000! OMG! 😀 [/edit]

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75 Comments on "My New Saskatchewan Farm"

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Yakezie (@Yakezie)
Guest

Now THIS is an awesome post and a fascinating topic! Well done! I love how you’ve got over 100 acres of land now. You can build a tennis court and a paint ball war field for kids! Think about all the possibilities.

I like how you already get a 3.5% yield from owning. Hope it turns out well for you!

HNY!

Sam

Glen @ Monster Piggy Bank
Guest

Brilliant post, I completely agree about using it as a hedge against Ben Bernanke. My dog knows more about finance than that twit.
I have always wanted to own enough land to be able to grow my own food and be self sustainable (at least for the most part).

Pauline
Guest

Interesting way to consider a negative cash flow property. As the world population grow and so does the need for food, prices should grow. And if you can subdivide for residential that definitely gives value to your land, some agricultural lands in more populated regions have restrictions on converting them to residential.

GreenWorld BVI (@GreenWorldBVI)
Guest
GreenWorld BVI (@GreenWorldBVI)

Pauline, you are spot on about the world population growth. We are an alternative investments firm, and farmland is by far our most popular offering. A big part of our argument for the asset class is the relationship between population growth and arable land (www.greenworldbvi.com/alternative-investments-options/agricultural-farmland). The reality is that whatever the fluctuations, the long-term (i.e. over one or two decades) of key agricultural commodities and therefore food prices is going to be up. The author is spot-on with his investment. My only comment though is that I believe it is very difficult for a non-Canadian to purchase farmland in Canada.

myownadvisor (@myownadvisor)
Guest
myownadvisor (@myownadvisor)

Great detailed post!

Congrats on the land…and I think this was a good move as long as you intend to hold the land for many years. It will certainly appreciate over time.

Your purchase is an excellent, long-term hedge against inflation. Just like some solid blue-chip dividend paying stocks are 🙂

Mark

theoutliermodel
Guest

Great stuff! We have the same mentality with our rental condo in Vancouver. We are slightly below cash flow positive as you are. But fit the same reasons we think it is a good investment. For someone that doesn’t want to put out the cash it takes to own a rental house or condo, this id a great alternative. I kind of want in, but we are already quite leveraged!

lkrant
Guest
lkrant

Very interesting investment! Can you eventually breakeven with rental income or is it all capital apperciation?

Jenny
Guest

Wow congrats! I’m very impressed! It’s gotten me interested in farmland.

Lil' Suburban Homestead
Guest

Very cool of you to share your experience and you dreams with all of us! and great you are already coming out ahead! By the way Mr. CBB sent me over here!

Maritimer
Guest
Maritimer

So is this just like a rental property in terms of tax advantages. The rent is regular income and you have regulations tax deductions like loan interest and property taxet. Also if you fly to Saskatchewan or drive to check in with your farm tenant, will all or most the the things of the trip be tax deductable?.”Things” included meals, hotels, transportation expenses.

the farmgirl files
Guest
the farmgirl files

I didn’t read your whole post as it was lengthy.However in my life time I have NEVER lost money on investing in property. The value always goes up. here in Ontario if you have a tenant farmer work your land and signs the government papers that he works the land your taxes drop 25%. That is a large sum over a lot of land. Also here in Ontario farm land is going for big bucks right now because of grain failures all over the world. Seems that farming is cool once again. What most forget is that farming is hard work, 24/7. That said, get a tenant farmer, he does the work your get the tax break. and in the long run a good buck for the resale in years to come.

RetireInNiagara
Guest

Congrats on the farm land !!! Sooooooo you can sell me 10% of that farm for how much ? 😛

Matt B
Guest
Matt B

Very thorough and interesting post! It shows that you spent a large amount of time on it. Good job!

Investment Road to Freedom
Guest

Wow this is amazing. Sometimes you have to think outside the box – this is certainly doing that. I look forward to reading your updates on this throughout 2013

Greg@ClubThrifty
Guest

Wow! Congrats! We look forward to reading your updates!

femmefrugality
Guest
femmefrugality

Super interesting! What a great deal! I learned a lot…never knew about letter grades for land!

Franko
Guest
Franko

That was a very interesting post, thanks for sharing in such detail.

Donna
Guest
Donna

Great post! I learned a lot from it, Thanks so much!!

con522
Guest
con522

Thanks for sharing that, I started on a similar journey a year and a half ago, I also have negative cash-flow. I’m expecting that appreciation will make up for it over the long term. The post is long but well worth the read, love your humour as well.

kevin
Guest

Next time you are looking for a farmer to rent your land, (or if you know other investors who are looking to find a tenant) check out rentthisland.com.

The website is free for the landowner to list their land, and have offers made on the property.
Once your listing closes, you pick the famer that best suits what you want, at no cost to you. Our process is a great way to make sure you are testing the market value of your land, plus it’s simple and free!

We just lanched and are getting the word out. Contact us through the site if you’d like more information.

test
Guest
test

I may have missed something while reading through…
You list your yearly loan cost as $4376 but your bank screenshot shows the monthly payment as $584. This skews your income vs cost calculation heavily away from -$700/year.

Insurance Broker
Guest
Insurance Broker

Very interesting posts about farmland investing. I’m exploring ways of diversifying my portfolio beyond the volatility of the stock market and this is very informative. The question I have is what about liability insurance for your land? Do you have a policy? For example if some kids on an ATV, Dirt Bike or Snowmobile injure or kill themselves on your property then you could be sued for millions. It would put a bit of a dent in your ROI.

Puzzled
Guest
Puzzled

Question on your bank financing with TD:
I contacted TD for financing and they mentioned they do not give Long Term Farmland loans for such a type of investment. How did you negotiate with TD? I contact several branches and office across the country and could not locate an office who was doing these. Note the rationale from TD was that they dont offer financing for these type of investments. Has nothing to do with my personal sitution.
Thanks

farmer
Guest
farmer

We as farmers should squash guys like u….well the Harper goverment is putting any end to guys like u..useing the system to get out of personal taxes..

RJ
Guest
RJ

I like the thought process behind this, but it’s very poorly executed. In 2013 the average purchase price of farmland in SK was $550/acre and average rent $33/acre.

http://www.westerninvestor.com/index.php/news/55-features/764-land-values

You paid $937.5/acre (70% above average) and rent for only $37.5/acre (14% above average). You either overpaid for the land, or are under charging for rent – likely both. I own a quarter of land in SK valued at $120k and rent it out at $44/acre.

This type of investment can be good if you find a good deal on land, and then aggressively negotiate the rent. This instance is a case study in over-leverage, particularly the debt at 8.75% for the down payment – just awful. You’re very exposed to interest rate increases which are likely given that the US is now into a tapering mode, and that you didn’t lock in for a reasonable length term.

A well executed deal in this space looks like this:

Land Purchase Price – $112k
Land Rental Rate – $6k
Tax – $400
Down payment – $28k
Financing terms – $84k – 5 years closed at 4% – $5377 total payment ($3360 interest, $2017 principal)

You should renegotiate the rent as soon as possible.

RJ
Guest
RJ

edit…my info on land prices was a bit dated…looks like SK land prices are now closer to $900/acre.

Still I just found 3 quarters for sale online for $450k with a four year land lease at $7k/quarter.

Kurt
Guest
Kurt

I know I bought a quarter same year guy was asking 80,000 offered 40,000 got it for 48,000 now it is worth over a 100,000 ? not only that I bought it when they were in a drought cycle he was getting 57 bales of hay off it. That same year I purchased the rain never stopped and when I cut the hay I got 600 large round bales sold them for 40 dollars each payed for my tractor, haybine ,baler and all expenses to cut it . So every year since have been averaging 250 bales a year and the price of feed (hay) just continues to rise. From 0.03 cents a pound to 0.06 cents per pound just cutting the hay has payed for the land itself. Only have to be there to cut and bale and stack it. About 10 days. Then even sell it where they load it them selves. Best investment ever. ?

How to Finance
Guest
How to Finance

Question on your financing; interested to know why you went with a long term farm loan rather than a conventional mortgage for the land?

Olivia
Guest
Olivia

Hi Liquid, I found your blog for the first time a few days ago and have been soaking up all the information you put down like… well… a liquid 😛

Was wondering if you know where I could learn more about farmland investing (soil grades etc)?

Really refreshing to find a finance blog that isn’t about “go back to college, get a good job, live below your means and save for retirement”

Vivien
Guest
Vivien

Real life farmville!

Ian
Guest
Ian

There is a quarter in Rm #274 (which is right beside the rm your land is located) that is listed for $275000 it only has 123 cultivated acres which is very similar to what your quarters have. This looks like it has been a very good investment for you!!

Olivia @ Essential Finances
Guest

Is there a “better” farm to buy when it comes to renting it out to farmers, like animal, cash crop, hobby farm, vineyard?

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Andrew
Guest
Andrew

Great information! Thank you for the awesome post! I’m interested in investing in farmland, and feel so lucky to run into your post.

I have one question here, do you own the farm yourself or your set up a company to own it?

Thank you!

Anand
Guest
Anand

I am in process of buying a farm land in SK and have some questions. Is there any email/phone to contact you?

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