Buying vs. renting land – here's what to consider
Land is always an expensive investment. And knowing if it makes more sense to buy or rent depends on your business goals. But first consider, will a new field truly make the farm better?
While the temptation to purchase property can be strong, Jeff Walkeden, an FCC Senior Relationship Manager based in Saskatchewan, says owning land generally makes sense over the longer-term. But that ownership should not harm the rest of the farm. To determine this, you need to spread the total (potential) purchase cost over a farm’s per acre income.
“If those land payments put the viability of the farm in jeopardy, you need to question that decision,” Walkeden says. This is particularly true as land prices continue to rise.
“Prices on paper compared to production results rarely make sense anymore. It comes back to the whole farm, and how much can that farm afford to eventually own that piece,” he says.
Once you establish a per-acre cost, you can compare it to rental expenses. In some cases, taking the latter course will prove much more suitable. Longer-term rental agreements can also help eliminate variability.
If buying property is financially viable, Walkeden says farm owners should ensure the parcel in question has the right qualities. This includes but isn’t limited to being in the right location for the current business and good, or good enough, soil quality. Knowing the parcel’s history through previous years of renting the ground, for example, also helps.
Consider whether a land purchase will really improve business.
“Check off as many boxes as you can to make sure it makes sense, to begin with. If you know it well and it produces well, it might be better to buy,” he says.
“A farm can only have so much project land in their land base. If all you’re doing is buying project land at high prices, is it going to work out in the end? If it’s land you know very well, then it helps make the decision a lot easier.”
You can use land ownership to accrue wealth for retirement, as well as for succeeding generations taking over the business. It can also be leveraged in cash-flow management.
Regardless, Walkeden reiterates the cost of ownership, high as it often is, must not place undue hardship on the farm’s ability to succeed.
“If there’s uncertainty, I have to ask if it’s good to take on these debt payments.”
Deciding between renting and buying land depends largely on a farm’s business goals. While owning land generally makes sense over the long-term, the purchase shouldn’t harm the rest of the farm. Other factors, such as soil quality and location to the current farm, should also be considered before purchasing.
Article by: Matt McIntosh