Four reasons to consider renting farmland
The advantages of buying property are well known to most farmers. It is a great way to build equity in your business and it usually grows in value over time. In addition, owning farmland offers more tax planning options down the road, allows you to avoid rent increases, gives you more freedom in the way you use the land and protects you from losing access to the land, in the event your landlord decides to sell the land or rent to someone else. However, in spite of all these advantages, there are also several reasons it might be preferable to rent farmland.
1. Cashflow
When you own farmland, whatever you are spending each month on principal and interest limits your ability to invest in other areas of your life and business. This is money you would not have available for farm equipment, buildings, production quotas, overhead (like seed, fertilizer and chemicals) and living expenses. At the end of the day, you are in business to enjoy a comfortable lifestyle and that requires cashflow, which is more plentiful for farmland renters than buyers.
2. Long-term acquisition
Even if cashflow is not a major concern for your business, the availability of land may make renting a worthwhile consideration. If there is one particular property you would like to purchase, but the owner is not interested in selling, renting this land could be preferable to purchasing a piece of land that is geographically further away or less than desirable for other reasons. If you continue renting this property for several years and develop a relationship with the owner, you may be in a better position to buy that property when it is available for purchase. The owner might even give you an opportunity to purchase this land without placing it on the open market.
3. Flexibility
When you purchase a property, it is far more difficult to get rid of the property if the needs of your business change. Selling property involves hiring a real estate agent, finding a buyer and getting a lawyer to draw up the purchase and sale agreement, which can be a costly, challenging and time-consuming process. In contrast, ending a rental agreement is relatively straightforward and inexpensive. There are also cases where farm businesses need additional land on a short-term basis – such as if you are growing a specialized crop you are not able to grow on the land you already own – for which purchasing would be an overly expensive and complicated option. Renting gives you an opportunity to temporarily expand the acreage you are farming without making any long-term commitments.
4. Debt-to-equity ratio
When lenders evaluate your business to determine if they want to lend you money or continue an existing relationship, debt-to-equity ratio is usually one of the criteria they consider. This is the amount of debt you have in relation to the equity you have in the business. If you have $2 million of debt and $1 million of equity, that’s a 2:1 ratio. The higher that debt number is versus the equity, the greater the risk lenders will perceive in your business. When you buy a piece of property, your debt immediately goes up in relation to your equity, which could put you at risk with lenders and make it more difficult for them to lend you money to construct a building or buy a piece of equipment. However, if you rent property, there’s no immediate effect on your balance sheet. This allows you to farm more land that could expand your operation, while keeping your debt-to-equity ratio in check.
Thomas Blonde
Thomas Blonde