News Farmland
Renting or buying land: what should you pay attention to?
Farmers must consider several factors before deciding whether to rent or buy farmland. That is why the government of the province of Manitoba (Canada) has prepared an information sheet with the most important points especially for entrepreneurs.
According to the Canadian government it is important, among other things, that agricultural entrepreneurs make the assessments in collaboration with (a team of) advisers. In addition, a good relationship must be built with the landlord or seller. Below are the 5 most important things to keep in mind.
1. Consider commodity prices
First of all, agricultural entrepreneurs must take into account commodity prices, crop yields and the extent to which the purchase can affect solvency and debt margins. When a mortgage puts pressure on working capital and the expected profit cannot cover the costs, then it is obviously not a good idea to buy. According to the Canadian government, it is more important to be able to repay comfortably and cash flow must also be maintained.
2. Weigh the pros and cons
The pros and cons between renting and buying land must also be carefully weighed up. When you decide to purchase the land, equity can be built up. However, buying land has 2 major disadvantages: the capital gains tax and the costs for the loan to purchase the land (for example, the interest and possible legal costs).
That is why renting is often referred to as a cheaper route seen as it gives farmers flexibility to invest in equipment, livestock or crops. Renting is an attractive option, especially among young or new farmers. However, renting also has its drawbacks. Some landlords do not want to enter into a long-term agreement, which means that the farmer cannot benefit from any investments.
3. Building a good relationship
Particularly when renting, it is seen as important that the relationship between the tenant and the landlord is good. According to the government, it is important that both parties have a common vision for the plot of land/company. This is also in line with point 2, because only with a good relationship is it possible to profit optimally from investments made.
4. Seek advice
Buying/renting land is a significant investment, so it is wise for entrepreneurs to seek independent advice before making this decision; this can be done through an accountant or a consultant, for example. Together with this advisor, the current cash flow and the consequences of renting or buying land can be examined. The questions that can be answered are, for example: what will our cash flow look like, or how can we anticipate the expected costs and revenues?
5. Know your numbers
Finally, it is necessary to calculate how buying/renting agricultural land affects the activities on the farm. The profit margins on arable crops can be quite small, which means that the costs have to be factored directly into the production costs. After all, otherwise the cash flow on the company is insufficient. It is therefore important to know the figures of your company.
Kimberly Baker
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