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To buy or to rent – that is the question

To buy or to rent – that is the question

Producers, together with their advisory team, should weigh multiple factors before making their decisions

By Kate Ayers
Staff Writer
Farms.com

Before opting to rent or buy farmland, producers must consider the state of their operations and financial well-being.

For example, a farmer must examine how much profit more land will produce and his or her operation’s cash flow, a Government of Manitoba article said.

Farmers should consider commodity prices and yields and how the land purchase could affect solvency ratios and debt service margins, the article said.

If another mortgage will put stress on a producer’s operating capital and the expected new profits cannot cover costs, buying the farm may not be the best decision. Maintaining cash flow and being able to comfortably make payments are important, the article said.

Farmers should also consider the pros and cons of each farmland acquisition option.

If they buy land, producers can build equity. They will have long-term use and control over this land, Laura McDougald-Williams, a farmer and partner with Meighen Haddad LLP, said to Farms.com in an email statement. This law firm has offices throughout southwestern Manitoba.

Potential cons of the buying route include the capital gains tax and the cost of borrowing to purchase land, such as interest, lender fees and legal fees, McDougald-Williams said.

Since renting is often the cheaper route, this arrangement can provide flexibility for farmers to invest in equipment, livestock or crop inputs, a Farmer’s Business Network Inc. article said. Renting land is a more affordable way for new or young farmers to enter the industry.

However, some uncertainty exists when renting farmland.

A landlord may only be willing to grant a short-term lease even if the tenant invests in the land by installing drainage equipment or applying  fertilizers, herbicides or soil amendments. The farmer may not be able to reap the benefits of that investment if the term is too short, McDougald-Williams said.

As a result, producers looking to rent farmland should build and maintain a trusting relationship with their landlords.

“Communication is key to ensuring that the farm stakeholders share a common vision for the farm,” McDougald-Williams said. 

“A strong relationship with landlords and frequent communication about the respective needs and expectations of the landlord and tenant can give added stability to (their) relationships.”   

Since buying or leasing farmland is a significant investment, producers should seek a range of advice to help them with this important decision.

“From personal experience with my farm family, I recommend annual strategic planning meetings with all stakeholders (i.e. the farm owners) and the support team of the farm (accountant or farm coach),” McDougald-Williams said.

“Our farm (family) has an annual meeting with (our farm business management consultant). We analyze the farm’s cash flow and look at projections if we were to buy additional land – what would the mortgage payments look like? How would we use the land? And can we anticipate what the expected expenses and revenues would be?”

Producers should calculate how buying or renting farmland would affect their operations, McDougald-Williams added.

“Farmers are constantly needing to (crunch) numbers. The profit margins on many crops can be quite narrow, so the cost of borrowing or the cost of rent needs to be worked into (farmers’) cost of production to ensure adequate cash flow,” she said.

“Know your numbers and don’t be afraid to call up your farm support team, whether it be a farm financial coach, lawyer or accountant, to pick our brains and to look at a question from different angles.”   

Kat72/iStock/Getty Images Plus

 

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