Farmland: buy or rent
by Lorne McClinton
Location, location, location, is real estate’s golden rule and few farms in Canada have a location better than Jim Herder’s at Sylvan Lake, Alberta. How good is it? Herder says a nearby quarter section (160 acres), with lakefront, recently sold for $3.8 million ($23,750/acre). The new owners got a bargain. After subdivision, the same land could easily fetch $16 million in a year or two. Sylvan Lake is a great place to buy farmland, as long as you don’t intend to farm.
“Land values are not determined by agriculture in our area,” Herder says. “We purchased a quarter about four years ago. It will take virtually all the profit that we make off of all the land we own for the next 10 years just to pay for that one quarter. It’s been a good investment. Land prices are still going up in this area and that’s virtually the only reason why we do buy.”
“Whether it’s better to buy versus rent land depends on the situation of the farmer,” says Brian Perillat, with Alberta Agriculture in Edmonton. For example, even though buying land may be a good real estate investment at Sylvan Lake, Herder is reluctant to take on more debt to buy land since the outbreak of BSE. For now he feels it makes more sense to rent than to buy. More than 75 per cent of his land base is rented.
“Before renting or buying land, producers have to consider the profitability, affordability and desirability of expanding their farm business,” Perillat says. “If it is profitable, producers then have to decide if it is more profitable to own the land or rent it. Affordability relates to cash flow – servicing debt and paying taxes in a purchase situation, or paying the rent fees in a rental situation. In high land value areas, affordability, not profitability, often becomes the deciding factor in a buy versus rent decision.”
Perillat says desirability is making sure you are still moving towards your business goals, which would be expanding versus trying other ventures.
“Theoretically you should be willing to pay more to buy than to rent, the big question is how much more are you willing to pay?” says Laurie Baker with McGill’s Macdonald College in St. Anne de Bellevue, Quebec. “When you purchase land, you are also purchasing the right to sell that land, which may or may not make some capital gain. In a rental market, you are only looking at the net revenue generated from the land after rental payments and operating costs.”
Herder turns down land every year because “any land I rent has to be profitable.We have a feedlot and have to spread manure so land that’s close to us has more value. If it’s only a mile away, the rent is basically free because the reduced trucking costs more than pay for the rent of the land.”
Herder says one disadvantage to renting is his land base isn’t stable. While he expanded by 600 acres in 2005, he expects to lose 300 acres in 2006. This means it is risky to purchase machinery just to take on more rented land. Before taking on any new land, he recommends that you first determine that you have the time, labour and equipment to handle it.
There are no hard and fast rules when making a decision to rent or buy. Ultimately, it all boils down to determining what’s right for every farm’s unique circumstances.
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