Jan 132020
 

Farewell to my 310 acres of Saskatchewan farmland

Farmers and Wall St. bankers don’t have much in common. But something they both seem to enjoy is getting down and dirty with their hoes. πŸ˜‰ Farming can be difficult. Some grain farmers barley scrape by. Luckily for me it’s a lot easier investing in farms than working on them. πŸ™‚

Thank you so much everyone for following me on my 7 year farmland journey. I have received a lot of comments and support regarding this major investment. But all things must come to an end. As you may be aware, last year I put my farmland up for sale with a real estate agent. Well as of last week I have successfully sold my farmland. πŸ™‚

I received my first offer after a few months of listing my land. The buyer and I negotiated and we ultimately settled on a price of $445,000. This is 5% below my initial asking price.

The advantage of getting out of an investment is being able to reflect on my decisions, and consider where I could have done better. In today’s post I’ll review my experiences of buying, managing, and selling the farmland.

Breaking down the numbers

I invested $40,000 of my personal savings, and leveraged up to buy $322,000 worth of farmland. It was basically a 12% downpayment that allowed me to greatly improve my returns by 8-fold. πŸ˜€

Farmland profitability 2013 to 2019: Let’s start by looking at the farm’s income statement over the years. In 2013 my operating costs were low because I only had a mortgage on one farm for most of the year. It wasn’t until the end of 2013 that I had closed on the second farm. I operated at a small loss in 2014 before turning a profit again in 2015.
Net operating profit: $10,000Β 

Let’s look at my capital gains next.

Capital gain = sold price – purchase price – transaction costs
Sold price: $445,000
Purchase price: $322,000Β 
Total commissions and other transaction fees: $26,000
Capital gain = $97,000
Cheese-n-rice! That’s the most money I’ve ever made buying and selling a single investment! This must be what affluent people feel like all the time. πŸ˜€Β 

Finally the return on investment can be determined using the following formula:

ROI = (Net gain from investment / Cost of investment ) x 100%
Net gain = $97,000 capital gain + $10,000 net operating profit
Cost of investment = $40,000

Return on Investment = 268%Β 

 

Wow. 268% ROI over 7 years works out to a 20% annualized return. πŸ˜€ Sweet sassy molassy! I feel simply elated! By comparison the TSX stock market index returned about 60% over the last 7 years, including reinvested dividends.

Here is a look at my farmland balance sheet over the holding period. $40,000 of cash savings was turned into $260,000 due to price appreciation and gradually paying down the farm loan.

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Looking back at 7 years of farmland ownership

The farmland I bought was a good property, but it wasn’t the best. It never became cash flow positive even after 7 years, lol. But I was clear from the beginning in my old posts that I was counting on the capital appreciation to make up for my cash loss. In the end my prediction panned out. πŸ™‚ But this wasn’t a complete fluke. I purposefully chose an asset class that would have a high chance to outperform other investments.

Using asset classes to become a better investor

Here’s the strategy I used – focus on broad asset class trends instead of analyzing individual assets. For example, the best performing stock market sector over the last decade was technology – up 328%. So let’s say you decided to buy and hold the general tech sector. This would have given you lower risk and volatility than buying an individual stock. Furthermore you would have outperformed most investors over the last 10 years, including Warren Buffett. πŸ™‚ It’s a simple strategy but it’s quite effective.

A rising tide lifts all boats. Thus it is far more important to determine which tides will rise, rather than look for which boats will lift more than other surrounding boats. It’s also much easier to anticipate broad trends in the market than that of individual securities.

We can use the same principle for real estate investing. Back in 2012, interest rates were low, and inflation was relatively high. So naturally it was a good time to invest in real estate. But instead of seeking out the best rental home like a normie, I took a step back. I first needed to ask, “should I even be looking at residential property, or is there a more profitable segment of the real estate market such as retail, industrial, or agricultural?” After some research the answer was clear to me. Canadian farmland was an undervalued asset class compared to condos and houses in terms of the total expected return.

Let’s compare the growth between farmland and home values since my last farmland purchase – the end of 2013.

We don’t have the latest data for 2019 yet. But during the 5 years from 2014 to 2018 farmland values across Canada showed 57% growth according to Farm Credit Canada. During that same 5 year period, the national average price for residential homes showed 21% growthΒ according to CREA. (From $391K to $472K)

It looks like my farmland decision was the right call. This is why understanding asset class trends is very useful. There’s less pressure to buy the best performing asset. Even my “good enough” farmland experienced relatively high price appreciation.

This strategy also gives investors a winning chance even if the overall market is down. For example, in Alberta the residential home sector has been falling for the last few years. But the agricultural real estate sector has been experiencing high single-digit annual price growth.

It was the same situation in Saskatchewan. Regina’s real estate market peaked in 2013. Meanwhile real estate outside of Regina have appreciated 30% or more. That’s not surprising. Based on my due diligence in 2012, Saskatchewan had the most undervalued farmland in all of Canada.

Real estate investing is always circumstantial

Although farmland values have increased more than residential homes on average, the actual outcomes for individual investors will vary widely depending on their property’s desirability and other factors. Picking the correct sector or class in any broad market is only meant to prevent penny wise and pound foolish behavior. But it’s not guaranteed you will end up choosing a good investment.

 

Why I decided to sell my farmland

Owning a farm and renting it out was a fun experience. It was relatively hassle free except when negotiating a lease renewal every 2 years. Paying property taxes is no fun either. At least I didn’t have to deal with clogged pipes or leaking windows because there were no pipes or windows to begin with. I was also fortunate to have leased the farms for 7 straight years – no vacancy period. But now it’s time for me to pivot away from farmland into something closer to home. πŸ™‚

As I approach Financial Independence (3 more years) I want to reduce my investment risk. This means transitioning from a growth oriented portfolio to an income generating portfolio. I plan to do this gradually over many years, but selling the farmland was the first step in this transition to a changing lifestyle.

In hindsight I should have sold my farmland earlier in spring of 2019. I would have received about the same price for it. But would have been able to buy a Vancouver property during 2019’s buyer’s market. Today’s real estate market is more balanced so it’s harder to haggle and find a good deal.

I also accepted below market rent for my farmland. This was my fault as I didn’t put much effort into posting ads or finding other farmers to lease my land. As a consequence I didn’t make as much rental income as I could have. I should have hired a realtor or broker to help me find more tenants. Saskatchewan folks are good at finding people.

But the capitalization rate (a measurement of income return) for farmland is usually lower than residential property. In order to boost my passive income I plan to use the proceeds of my farmland to buy a condo and rent it out. I will be sacrificing all future growth of my farmland. But in return my passive income and cash flow situations will improve. πŸ™‚

Overall I am pleased with the outcome of my farmland investment. Letting go of the farm was a bittersweet decision. But I think the new owner will take good care of it. Apparently he reads my blog and reached out to me after the sale closed. He seems like a smart guy – as most of my readers tend to be. πŸ˜‰ Canadian farmland will likely continue to see price appreciation in the years and decades to come. The demand for food will increase. Everybody has to eat. Except maybe Christian Bale when he’s losing weight for another movie role.

Increased liquidity

Selling the farmland has unlocked a huge amount of investment capital. I received the proceeds of the sale a week ago. It was a jaw dropping $260K. Hot diggity dog! That’s the largest deposit I have ever received! πŸ™‚ Technically I could use this money to pay off all my remaining loans and become completely debt free. But paying off debt is too mainstream. I never would have made so much money today if I had conformed to established financial practices advocated by Dave Ramsey and other “gurus.” πŸ˜›

So instead I plan to reinvest all of this new capital into real estate and stocks to continue producing wealth for me. πŸ˜€ The secret to a prosperous future is to have my money work harder than I do. The primary reason for adding farmland in my portfolio was the diversification it added. During the great recession in 2008 the Canadian stock market fell 35% while farmland values grew 11%. Now that I’m out of the farmland business I will be looking for alternative diverse investments to fortify my portfolio. I look forward to finding new opportunities this year. πŸ™‚

 

____________________
Random Useless Fact:

It can take 5 to 20 years for an oyster to produce a pearl.

 

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RAMON
RAMON
01/13/2020 8:07 am

congrats! I’ve been following for a long time and I always wondered when you would offload the farmland. I had a question for you, do you do your own taxes or pay someone? I have trust issues lol

name
name
01/13/2020 10:03 am

Is that Remax? Huh, did not know they operate in Canada as well…

Roadmap2Retire
01/13/2020 10:43 am

268% in 7 years is fantastic. That is a nice tidy bit of liquidity freed up indeed. Congrats on the gains and thanks for sharing.

R2R

AlW
AlW
01/13/2020 8:58 pm

I would say you got a 15% compound return (1.15^7) = 2.66. It’s still great! I was actually talking with a farmer patient today – he was saying a few pension funds were gobbling up farm property in the province.

AlW
AlW
01/20/2020 5:36 pm

Ended up having a 3rd kid, so didn’t get around to building the cottage. With the 3rd kid we decided to build a brand new dream home it’ll be close to net zero so there should be some definite energy savings there (not sure what the ROI will kick in at)

S Arun
01/14/2020 8:00 am

Congratulation Liquid πŸ™‚

Awesome 268% return in 7 years. Very impressive! Looking forward to see how you are going to use $260K in the coming weeks/months.

Cheers,

beth
beth
01/14/2020 8:15 am

You say that some of the money from the sale will be invested in real estate. Will that be a house for you or a rental property?

Carl Densem
Carl Densem
01/14/2020 9:25 am

Well done on a wise choice! As always, I liked your thoughtful explanation of why you invested in the first place – reflecting is oft forgotten and offers free lessons. Are you considering real estate anywhere else in Canada? Is there any metric aside from how much you can rent it for that you will use to make the decision?

Serak the Preparer
Serak the Preparer
01/14/2020 2:49 pm

Congrats on the success! I’m sure you’re aware, but if not – you’ll need to set aside money for tax on the capital gain. Depending on your income level, you’ll likely need to pay around $15-22K on a $97,000 capital gain (in BC).

Samantha
01/15/2020 1:54 pm

You had a great return on your RE investment, but I’m not sure that going forward RE in Canada is the place to be. I think for the next few years we get a big run up in many commodities – oil, copper, silver, etc.

GYM
01/15/2020 10:50 pm

OMG can’t believe you wrote this:

” But something they both seem to enjoy is getting down and dirty with their hoes”

Haha…. terrible!

Anyway, congrats on the farm sale, those are some fantastic returns!

P C
01/17/2020 12:39 pm

Amazing returns… your farmland investment was worth it in the end. You use debt as an advantage… there are so many naysayers to leveraging so high. But if you can keep up with the payments, you’ll be rewarded in the end! My assessment for my investment property went down this year… should have cashed out at the highs??? πŸ˜€

JC @ Passive Income Pursuit
01/20/2020 7:06 am

Congrats! That definitely worked out well. $260k on a $40k investment is fantastic. Also, that per acre price in Minnesota and Iowa is crazy. That’s a nice amount of liquid cash you got now and I’m sure you’re ready to get it back to work.

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[…] a previous post I explained how to improve investment returns by primarily focusing on broad asset class trends instead of analyzing individual assets. In late 2019 I was trying to find the most undervalued […]

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