One of our readers asked if we’d considered leasing land instead of owning it. When we first started down the mental farming road a little over a year ago that was one of the first things I researched, and I can’t say that we’ve officially decided on either option, but we are leaning heavily. Of course, the answer to everything in farming is "it depends", but that drives me crazy, so here's some thoughts off the top of my head.
Probably one of the biggest considerations in the lease vs. own dilemma is understanding your current capital position. If you are hell-bent on farming but have little capital then you are left with few options besides leasing. If you have capital you need to determine whether it makes sense to invest it in land, or whether you might use that money elsewhere, say for buildings, livestock or equipment. I tend to believe that if you have enough money owning land (at the right price) probably makes more sense than leasing.
Cost and Market-Timing
If you have enough capital to buy land, the next question is, “should you?” Part of that boils down to what your view on the current real estate market is. Do you think real estate prices are abnormally high and likely to decline in your market? Or, are real estate prices particularly low and you think it might make a reasonable investment and also result in an affordable mortgage? Could you lease land at a far lower rate than what a mortgage would cost? If you can lease land at a lower rate are you willing and able to adapt your farming model to fit with the non-financial considerations I'll talk about in an upcoming post?
Financing the Farm
A mortgage is a cheap form of financing. In our situation we will not have enough savings to pay cash for the creamery, barn, animals, feed, vehicles, tractor and also purchase the land outright. We will need to finance one, or both. The cheapest form of financing that I can think of is a mortgage. Most private loans for unproven, start-up businesses have very high interest rates and require much more than 20% down.
If we were to lease a farm we could use our savings to fund the rest of the business and just keep paying the lease payments over time. That would be the least expensive option in terms of immediately funding the start of the farm. Longer term it would probably be more expensive, but at least we could get off to a good start.
Assessing the Current Housing Environment
Mortgage rates recently reached all-time lows. Prices for homes and small acreage continue to plummet. Demand is nowhere to be found due to strict down payment requirements and the recent economic downturn. Credit is harder to come by, even with an excellent credit score and sufficient earnings. All of these factors play well into the argument for purchasing land, albeit making it much harder to actually do so. When it's easy to get financing and prices are high and rising it can be tempting to buy land, but it's pretty much always a good idea to be a contrarian when it comes to real estate, if you can.
Bought and sold at the right time, land can (and should) appreciate in value. Leasing land bears no risk of devaluation, but you miss the upside as well.
Those are some ideas off the top of my head. Next up are the non-financial considerations.