There are many reasons to acquire a mortgage against land as an investor or active farmer. The primary reason is to purchase land. For active farmers it may be to secure financing to purchase farm equipment or to secure a line of credit to help with day-to-day operations of the farm.
In this blog we will focus on the financing of land as an investor. An investor typically wants to invest in land to diversify their portfolio. To have a grass roots connection to a place where food is produced and a fall back to one of the most solid assets available anywhere in the world.
Once you have discussed your desire to purchase land, and your household is aligned that purchasing farmland and becoming a landlord is the direction you want to go, you will have options to consider in your purchase.
What type of land will you purchase? Land has a wide range of soil types and quality which is related to productivity. You can purchase light textured land suitable for grazing and pasture use; or you can purchase land with a heavy texture and improved water retention for more consistent year-over-year grain yield.
Where will you purchase land in Saskatchewan? Would you choose something in the black soil zone north of highway #16 suitable for canola and wheat production; or would you prefer land suitable for lentils and chickpeas in a more southern zone of the province?
Once those key decisions are made with an ag realtor, a multitude of decisions and steps are taken to assess the land: the area, the farming history, past management, weed resistance, chemical residue, neighbours and possible tenants and the list goes on depending on the buyer’s needs. Finding a knowledgeable farm realtor with long-term roots in Saskatchewan and network in agriculture is key to your success.
Now financing, what does the bank want to see:
- Three years of financial statements and an up-to-date personal net worth statement is a minimum.
- Ability to repay from farmland rent proceeds or from cash flow from your day job, or both.
- Ability of the buyer to have a minimum of 20% down payment on the appraised value of the land and assets.
- Banks don’t want to gamble on financing a premium paid on farmland over and above historical sales transaction data in the area. If you want to buy land in an area that’s hot in activity and productivity, then be prepared to cover that premium paid with more security or cash.
- Typically land rent does not cover the mortgage payments and property taxes. You will need extra cash flow to offset these costs. Higher cash rent in the future will likely begin to cover the costs of mortgage and expenses but be prepared to cover that gap for some years and be prepared for downsides to farm profitability or to interest rate changes that can affect land prices and land rent very quickly.
- Choose a bank and a business advisor that knows agriculture. Someone that sees and understands the economics of farming and land purchases very clearly. A great working relationship between a farm realtor and business advisor is a great combination to find. Your realtor is key to having that network.
Tracy Greier, MSc, PAg
Business Advisor 1
Conexus Credit Union,