By now you’ve realized that you need to save up a lot of money, at least $110,000 to buy a farm property. You’ve calculated that it’s going to take you at least five years to save that kind of money and that’s just to buy the land and infrastructure. Consider renting the infrastructure to start your farm. Renting comes with a different set of risks but it has the potential to help you achieve your dream faster.
The advantages to starting out by renting can include:
1. Family might be more able to help you; they might have empty buildings or a plot of land you can rent.
2. Financing is easier to obtain because you will have an on-going business.
3. Less investment to start-up
The main thing to pay attention to when renting is to make sure that you have the rental agreement to protect yourself and your investment. You will want to spend some money on legal advice to make sure the agreement is fair to you and does not increase your risks.
Make sure you have an end goal in mind. If your goal is to own your own farm, you should plan to rent for five years or less. There are a number of financing advantages to having a farm operation before you actually purchase a farm property but these can be increased even more if you still qualify as a beginning farmer. A key loan program that should be on your radar is CALA (Canadian Agriculture Loan Act) which will loan you up to $500,000 to buy farm property or assets. One of the requirements is to be farming less than 6 years.
It is important that you have a business plan and income projections for your farm operation before signing any leases. This way you will know if that rent costs is sustainable for you. While there is generally a loss to starting a farm operation, you should always make sure that the rent price does not push your costs too high.
If you want to relocate to a more affordable farming area, investigate moving before you set up your operation. It is very expensive to move an active farming operation. Moving before you purchase will also help you build connections to suppliers, customers and the community.
Renting before buying can also give you a chance to test the waters so the speak. If you are not sure if you actually enjoy a certain sector or type of farming, renting can give you a chance to try it out with less investment.
When you plan to operating before you own a farm, essentially you will be running the business without the cost of a mortgage. To make this plan work for you, you want to keep the lease cost at a fraction of the mortgage payment. Basically the cost of a mortgage payment each month should be going directly into your savings. Your investment should only be into equipment and livestock that you can take with you.
The costs to rent land and buildings are an expense and will increase your costs of production. A general rule of thumb for rental rates that should be based on a factor of production for it to be advantageous for you. For example, land rents are usually based on an amount per workable acre. Buildings are either by square footage or the number of animals housed. If your operation is going to be livestock based, make sure you take growth into consideration. If the per animal rate is going to exceed the square footage rate within two years based on your expansion plans, do not negotiate for a per animal rate. If your family is already involved in agriculture, you might have the opportunity to rent land or buildings from them to get started. If renting from family gets you a favourable rate, make sure you are saving the difference for your down payment or future investment.
A major advantage of operating before you own property is that it gives you actual financial statements and business feedback. If you can not be profitable renting infrastructure, then either the rent rate is too high or you need to spend more time evaluating your cost of production. You should be able to add both the mortgage payment saving and the profits of your operation to your down payment savings. Operating without a mortgage payment allows you a bit of time and breathing room to make mistakes.
Renting to start your farm comes with a unique set of risks. Since you do not own the land or the infrastructure, there will be limitations on what you can do. You will always have to be in communication with the landlord about any changes you want to make. There might be input requirements that you have to make or prohibited uses. If you are renting a barn for livestock, there is a chance that you could lose your lease and have to move before you are ready to do so. This could place you in the terrible position of owning a large number of animals and having nowhere to go with them.
As stated earlier, do not invest in making physical improvements to the buildings and land you are renting if you will not be compensated for the money spent. Make sure that you consult a notary/lawyer before signing any agreements. The timelines, payment dates and any other terms should be clearly outlined in the contract. If possible, you should make sure there is an automatic renewal clause or that the agreement extends for several years. If you are renting a barn, make sure the agreement covers who is responsible for maintanance, utlities and insurance.
In the end, this move can really pay off for you because once you have your farm property, you will have an on-going operation that should be generating income for you from day one. It gives you time and space to find the right farming sector for you as well as finding your management style. You might find that running your operation the way you planned is not working at all for you. Not having to worry about a mortgage payment means you can make adjustments more easily. The biggest benefit is by far being able to present good financial statements when you go to apply for a mortgage. Just make sure you consider all the risks and take as many precautions as possible.