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.
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)
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 😀 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?
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 😀
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
That IS interesting.
Curious — what are you assuming will be the capital appreciation and in how many years? Do you have numbers on this?
Also as you took out a loan on this, how much are you paying on the loan as an interest rate?
The loan I took is $112,500 (or 75% of the purchasing price) Interest rate is at 3.89% fixed for 1 year 😀 So I will be paying about $4376 of interest per year.
I’m assuming a modest 1.5% capital appreciation annually over the next 10 years for this investment to work out with a decent 7% return on my money :0) Over the past 10 years Canadian farmland has appreciated by 10.6% per year. Farmland typically generates higher absolute returns than listed equities on the Toronto Stock Exchange over most measurement periods. However because past performance doesn’t equate to future returns I am only expecting 1.5% which gives me a big margin of safety (^_^) I think part of the reason for big price increases in farmland may be related to speculation. So from a fundamental point of view, farmland should at least keep up with inflation and I think 1.5% inflation is a relatively low estimate for the next decade or so if we compare that with historic inflation rates. Those are the numbers I have to back up my assumption. But I don’t have any hard evidence that it will happen. I just hope it will :0)
Wow, that’s pretty balsy of you. Good for you. I hope it works out for you.
I did however bought into the farmland capital fund, and the return has been decent – of course I’m not doing anything physically, just hoping for the investment to climb. You went to the source!
Very cool Captain, glad to hear it’s been working out well for you :D. I spoke with someone at Raintree about buying some AgCapita funds, but unfortunately I was too late and their farmland fund is now closed to new investors, but I think investing in funds like their’s can diversify your risk so you’re not just isolated to one area of the province like I am. I will definitely be on the lookout for new exempt market opportunities though, farmland, oil, or otherwise. Thanks for dropping by fellow farmland investor :0)
Congratulations! I have 370000 sqm here in Guatemala and my price was only 30% cheaper than you, so it seems cheap for Canada. How many months a year do you think it can be used for cultures? Can you build a house on part of the land should you want to?
90 acres is also a pretty big piece of land. You can probably do almost anything you want on it. Maybe grow your cattle ranch business there :0) Yes, Canada has some of the most affordable farmland in the world and Saskatchewan has more than 40% of the country’s arable land space. The government has artificially suppressed the price of farmland for decades, but they recently lifted that limitation so that’s why prices have been so cheap but are now growing really fast. The ground is frozen solid during the winter so normally farmers would seed in March/April and harvest in Sept/Oct, so it’s usable for probably 9 months out of the year. I can build a shed or small shack/lodge type building and camp out in the summer or something, but if I wanted to build and live in a proper house it’s best to subdivide a few acres out for residential purposes first because getting permits for electrical/plumbing will be easier.
Wow….congrats on the land! That thing looks HUGE!!!!!!!!! That would be a good place for a long run 😉
It would be :0) Nothing like going out for a morning run in the great outdoors.
Thanks pal. Looking forward to depositing my first rental cheque and following commodity trends next year :0) Will keep you all posted.
What a creative investment! That’s such a large area. Best of luck with it!!!
Aye, thanks :0) Yeah it’s pretty big. Imagine making a corn maze out of that entire space. If you get lost you’d never find your way out again lol..
Wow. I’ve never heard of such an investment before. Will it be difficult to manage? Will you have to carry out environmental assessment or make sure you comply with laws relating to farmland? just curious. Exciting new investment.
Luckily it won’t very difficult to manage 🙂 Right now I just leave it up to the farmer who works around that area to grow his crops and look after my land for me. No environmental assessment is needed unless I plan to do something else with the farm other than use it for agricultural purposes. The only rules regarding farmland would be related to spillage of hazardous chemicals or things of that nature but I don’t see that happening unless somebody trespasses on my property, which is illegal, and my tenant can just tell them to get lost 😀 Regular pesticides, nitrogen fertilizer, and herbicides used by farmers are all standard procedure and are in compliance with environmental laws. I just have to remember to pay my property taxes on time every year :0)
160 acres (about the size of your quarter section) is almost standard farm size down here. Hope the tenant farmer takes good care of the soil. Good move.
I think we use the same system up here. Most land titles are for either quarters or sections. Some of our farmers this side of the border actually drive around US vehicles which has the odometer read in miles instead of kilometers so it’s easier to navigate their way around the fields out there, lol.
This is a totally unusual investment for the most of the financial bloggers. I hope it wil work out.
Is there an opportunity for expansion if you want some more?
Thanks, maybe other bloggers will follow if this investment turns out to be profitable 😀 I plan to expand my farm in the future by purchasing more farmland which are selling around my existing plot. One quarter is really small and it’s not as easy to rent out as 2 quarters or more. Kind of like how 2 bedroom apartments are easier to rent and sell than small studio apartments 😉
I absolutely love that you are doing this because I haven’t heard anyone else do this but it sounds like a great idea!
Yeah, I’ll let you know how it turns out next year.
I like how diversified you are in your investments. Keep up the good work 🙂 Happy holidays!
Happy holidays to you too 🙂 The global economy since 2002 has grown by a lot, the question is where did that extra value go to? Many people say the stock market hasn’t performed well in the last 10 years. That may be true, but other investments like oil, gold, and farmland have all increased by more than 100% during that time. Keeping a diversified portfolio is the secret to any long term investor because if you miss out on one asset class (like stocks or bonds) you will probably still make a profit somewhere else :0)
hmm. i like the idea, and the asset, but not sure i like the focus on capital appreciation. buying assets for the purpose of capital appreciation is highly speculative. this is basically like buying a condo/house for the hopes of price going up, or buying a stock in the hopes the price will go up. 3-4% rent yield is certainly interesting, but its not out of this world attractive. how is the rental demand? will you be able to increase the rent at a rate well above inflation? do you think you can get 3-4% after fees/costs, and increase it at a 3-4% per year? another interesting idea i had is to buy parking spots in my condo building for example. they cost around $30k, and can be rented out for $150 per month, or $1800 per year, or 6% yield hahaha. way better than those 1-2% GICs, but hard to raise prices on parking i think. unless eventually you own all the parking spots in your building and have a monopoly =P i try to compare these income opportunities with stocks and its pretty hard to beat stocks right now. you can get stocks with 3-4% yields and growing… Read more »
Good point, it’s a speculative play to bet on capital appreciation. I just hope my research has been accurate and my expectations aren’t too high at 1%-2% a year. The rental demand is good for that area of the province so I shouldn’t have problems renting it out. I don’t know if I can keep rent in line with inflation or not though so there’s a chance rental income in real terms will decrease over time. But given how closely tied my tenant’s revenue is with commodity prices because he grows and sells them, I should be able to increase lease rates in the future if crops continue to gain value. The good thing about commodities is I know exactly how much he’s selling his wheat for :0) and can keep track of it over time and use those numbers to justify the higher rent if applicable.
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