[Editor's Note: This a guest post by Dr Dan Hesler, an anesthesiologist and regular reader who has introduced a lot of docs to WCI over the last few years. Glad to have him as a contributor and grateful for his help in spreading the WCI mission to boost financial literacy among high-income professionals. We have no financial relationship.]
Several of my physician colleagues have sought my advice regarding whether investing in agricultural or timber real estate makes sense for them.
Why Me?
When I am approached for advice, I imagine that it is because I grew up farming with my father and grandfather, and now also own a farm of my own. The sum of these experiences lends to some insight into what owning land involves…both the upsides and the downsides.
My Background
I am an anesthesiologist who lives on a working farm (we currently grow corn, soybeans, and timber) in the Midwest. The posh suburbs and “doctors' neighborhoods” are great, but just not for me!
After residency, I returned to practice in my family's hometown, and have now been here for nearly a decade. Shortly after signing my employment contract, the opportunity arose to purchase a sizable farm with a house and barns on it, so I took the leap and dove into this experience.
Eventually, I met my wife, who is also in medicine and hails from this same town, so I did not have to sell rural living to her! (This is a key point…as I have several friends who have also had interest in purchasing a farm, but could not convince their spouse to be on board with the idea.)
Having been a landowner for nearly a decade, I've learned some lessons on property ownership that I hope others might find instructive as they consider this investment.
Our Investment Philosophy
Dr Hesler and his wife showing off their favorite tax deduction
My wife and I are both first-generation healthcare providers. Many in our family did not have the opportunity to attend college, but they did instill within us the values of hard work and of saving a dollar. Growing up in families with “lesser offenses” (earning) but “strong defenses” (living on less) taught us to appreciate the incomes we now enjoy without feeling the need to live in a “high-income doctor neighborhood.” This has certainly been helpful to our financial situation. It is much easier to curtail your spending habits and invest more money when you live in an area where the median income is not six-figures.
We share a philosophy of living on far less than we earn, saving money, giving to charity through our church and community, and rapid debt reduction/borrowing wisely.
We consider tangible assets to be an important investment class in our portfolio, but that does not stop us from funding our traditional market-based IRA/401k portfolios, especially given the advantages of tax-deferred investing during our peak earning years. Essentially this is a two-pronged approach of investment in both the stock market and in tangible assets such as real estate.
Not for Everyone
Please allow me to preface this by saying: Owning farmland is not for everyone! Many of you will read this commentary and find that you are more comfortable investing in the stock market, commercial/rental house real estate, or some other alternative investment. Even under ideal circumstances, owning farmland may take more time and energy to deal with than many other investment vehicles, especially compared to passively investing in a market index fund. I am not here to sell anyone on the idea of rushing out and buying farm or timber land; I am merely presenting the arguments both for and against it. It is a serious and long-term commitment, and even though there can be many upsides, many people have been burned speculating in the real estate market. It is imperative that you enter this process informed.
Economic Upsides of Investing in Land and Timber
- Land is an Income-Producing Tangible Asset that will fluctuate in value, but will never be “worth nothing.”
- It is a dividend-yielding asset that, if historical patterns hold, should appreciate over a long-term time horizon.
- Even in real estate market downturns or economic depression, land maintains some intrinsic value.
- Land produces items that should be in high demand virtually forever: food and timber.
- It is a physically-held property, not a paper stock certificate for a business that can become worthless in a moment's notice. This contrasts to stocks in companies such as Enron, WorldCom, or Bernie Madoff's firm…all of which became as worthless as the paper they were printed on in a matter of days.
- Multi-Generational Asset: Land is an asset that can be passed down to future generations as part of your “legacy.”
- Hedge against stock market volatility.
- Land prices are often not correlated to stock market performance–neither the ups, nor the downs.
- Excellent motivation for me to live on less and invest more early on in life.
- Because I was motivated, I paid off the mortgage in 5 years instead of 30.
- It helped me maintain financial focus, contain my lifestyle, and “not live like a doctor.” I am not sure I would have had this much financial discipline early in my attending career if I had been investing exclusively in the stock market.
- When set up properly (good tenants, fair leases, etc.), farmland can provide fewer headaches than commercial or residential rental properties, as well as have less costs of managing the property and collecting rent payments.
- Cash rental payments are often made by the tenant twice annually, Spring and Fall, which makes collecting rent an easy process compared to that of rental houses.
- Tenant farmers are usually responsible people (often CEO's of a multi-million dollar farming operation), and the rent collection process is usually not unpleasant or difficult. This stands in stark contrast to many of the tenants of low-budget rental homes who don't always have a reputation as the most pleasant or reliable folks to collect monthly rent payments from.
- If you have enough (paid-off) land by retirement, it can be a great source of passive income.
- “Snowball Accumulation” can work well. If you have income-producing farms, once you have one farm paid for, you can purchase a second and have two farms paying for one. This cycle can continue to compound several times at an accelerating pace until you are the owner of several tracts of land by your retirement.
- This snowball relies on your financial discipline to reinvest the rental/timber proceeds back into the land, whether on capital improvements, or on early mortgage payoff. It should not be treated like additional income until you have reached financial independence.
Non-Economic Upsides
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For my family, it is our chosen way-of-life. We love living in the middle of God's country with no neighbors, traffic, or skyscrapers to contend with. We look forward to instilling the same values of hard work and common sense in our children as our parents and grandparents did for us growing up around a farm.
- After a hard day of stressful work at the hospital, there is nothing better than coming home and relaxing in God's Creation.
- Hunting, fishing, and recreational activities abound for us. Cutting firewood is also a great way to get off the couch in the winter time.
- Some of the “tools” you need around the farm are just plain fun, and may be tax-deductible if you structure the business model properly. For instance, a tractor may be a necessary expense to maintain the property, and hence a tax deduction. (Check with your accountant ahead of time, as Hobby-Loss rules may apply.)
- As my Dad always told me: “You'll never go hungry if you own some land.”
Economic Downsides
- Investing in land is not for Rookies. Many investors have lost significant money speculating on land. You need to understand the local community structure, and the nature of the business, or you can face some severe financial losses. Someone with an agricultural or rural background (and local connections) probably stands a much better chance of making money from this investment.
- There can be just as much volatility in land as in the stock or housing markets.
- To make the “Snowball Accumulation” model work, you may need to subsidize the first farm's rental income to pay the mortgage off rapidly (this cuts into your discretionary income the first few years you purchase it).
- ROI rates may not be as high as with commercial or residential rentals.
- Major Annual Expenses such as property taxes, insurance (I definitely recommend carrying a sizable liability policy and umbrella coverage on yourself that also insures your property), and maintenance (might be done by Tenant, depending on lease).
- Other Major Possible Expenses such as major repairs to buildings, grain bins, wells, field ditching tiles, roadways, and timber stand improvements.
- Limitation of Tax Benefits: Hobby-Loss rules prevent showing a “loss” for too many years, so expenses are only deductible to a certain expense cap. Work with your accountant ahead of time to develop a good game plan before this is an issue. According to my accountant, doctors who own farms are more likely to be audited because “You're in the business of medicine, not farming.”
Non-Economic Downsides
Land can turn into “just another headache to deal with” to an already busy physician. Owning land has to be a personal passion, or else you are probably better off investing in other more market-based investments. There can be a significant amount of upkeep (time and/or expense) required, depending on the situation.
Many people may have no interest in owning land, and are better off building a portfolio of investments that have a “paper value” to them.
Key Points for Investors
Land Valuation
It is important to know what you are buying, and how much it is truly worth versus what you are paying for it.
Determine the income-generating potential of the land:
- Crops- cash rent or sharecropping arrangements on crops such as corn, soybeans, or wheat
- Hay
- Livestock
- Rental of Barns or Grain Storage
- Timber Income
- Mineral Rights- oil, natural gas, etc. (Verify that the purchase agreement conveys all mineral rights with the land.)
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Property Taxes
Rates vary greatly between states, and even between adjoining counties.
Liens
Make sure you aren't inheriting any unknown liens with purchase. Even if you are buying a property in cash, paying for a title search will be money well spent.
Many variables play into the value of a parcel of land:
- Topography (size, borders, “rolling” versus “flat” terrain)
- Soil type (clay, sandy, or black)
- Whether soil quality and fertility has been kept up by prior tenants
- The condition of drainage/tile systems, waterways, fences, buildings/grain bins, and roadways. Repair of these items can be very costly.
Transitioning to New Tenants
Determine whether the current tenant has any rights to lease past the current growing season. Attempt to execute a seamless transition to the subsequent tenant if you choose to change tenants.
How to Have a Good Tenant Relationship
- Attempt to find a fair, honest, good tenant who will take care of your investment (the land) and is financially stable in his/her farming operation. (Avoid tenants who have an appearance or reputation of being over-leveraged.)
- It is advantageous to find the right tenant for a long-term business relationship, rather than to change tenants every few years. Continuity and stability have value in a landowner-tenant relationship.
- Have a good/fair contract in place with your tenant, and make sure the tenant has a good reputation locally.
- Sometimes it is more valuable to have a tenant who pays slightly less but takes better care of the land (maintaining soil fertility, ditching, and general upkeep) than a tenant who may pay a little more but does not properly care for your land. Remember that your land is YOUR investment that you want to maintain for decades to come.
- If you don't live in the area or have good contacts in the area (or have limited knowledge of agriculture or timber), consider retaining a reputable land management firm. This will eat into your profit margins though, similar to a property manager for rental houses. A property manager is an unnecessary expense if you understand agriculture, have a good relationship with your tenant, and live reasonably proximal where you can check on the land frequently.
Publications/Reports to Help Determine Values
Utilize objective reports such as the following, to help determine purchase/sale prices, cash rent values, and soil values:
- “Purdue Agricultural Economics Report”
- “Illinois Soil Productivity Index“
- “Iowa Corn Suitability Rating“
Unique Aspects of Timber
- Timber is unique in that it is a “once-a-decade” payment:
- It can be sold in varying years, and keeps for years on end until you decide to sell some timber from your woods.
- Can be sold strategically based on:
- Your tax situation of each year
- Timber market fluctuations in the value of the timber
- Timber income is treated as passive income subject to capital gains rates. There may be value in your tax situation to have income from this “bucket.”
Do you have any “alternative investments” that double as a life-long dream, a loved hobby, or a way of life for you and your family outside of medicine? Have the sacrifices to make that dream a reality been worth it? Comment below!
Very nice article outlining an investment vehicle that is not discussed much. Wondering if dan thought tillable land prices have reached a peak and are coming down after a long increase in value ?
Thanks for the question, Scot.
I’m in no means anything close to expert, and even the “experts” disagree on where prices are headed. It is purely speculative to say where the short term land prices and/or cash rent values will go tomorrow. There was a steep increase in values/rents in a run-up to 2013, and have since decreased from that peak. It doesn’t appear that there is a collapse in prices looming to the extent seen in the early 1980’s, but the next few years may very well see land prices remain stable or decrease somewhat (ie- your dollar buys more acreage). This can be viewed as opportunity to buy low if you are positioned to do so.
Several factors pressuring land/rent prices downward may be:
– Change in tariff policy, affecting exportation of crops
– Changes to farm subsidies
– Change in demand for corn in ethanol production
– Rising production “input” prices that can carve into a farmer’s profits (ie- the ability to pay higher rents), including fertilizer, herbicides, fuel, and equipment
– Interest rates- as these rise, the ability to borrow for more land or input costs (to plant crops and purchase equipment) will be impacted in a way that has downstream impacts on rents/purchase prices of farm land
As a counterpoint, factors that may lead to an increase in land/cash rent prices include:
– Decrease in available agricultural land as more land is being developed into commercial or residential property, thus driving up the purchase price of available land and/or seeing farmers needing to pay more per acre to rent ground
– Increase demand in agricultural products (food and timber) as the worldwide population expands
– The 2017 tax law changes may help more farms stay viable with decrease in income tax rates and/or pass-through deductions
BOTTOM LINE: I am not invested in farm land for short-term or speculative purposes. I believe that in the long-run, owning some land as a portion of your portfolio makes sense for some of us, and over the long-term it should be an asset that both appreciates and yields some income. Plus, for my wife and I, we are drawn to a rural lifestyle. For others, it does not make good sense to do this versus another tangible or alternative investment (especially disinterested or long-distance absentee landowners). Investing in what you know is always smart, as it’s less easy to be taken advantage of.
Dr. Hesler, . Congrats on diverting your anesthesia income tax burdens into land investments.
My scattershot questions:
Ag land value is propped up by the myriad of labyrinthine tax laws. How well do you really understand the underlying tax laws? Are you vulnerable to farm tax law changes? Active vrs. passive farming determines the extent of tax deductions? Tenants are limited to your local region, no?
Sale price of my farm in future will be inflated if we all think the corn alcohol subsidies will last; when they are over and if some other programs like wetlands (we have a 60 acre slough on the quarter section) maintenance are ended again our tenants would get a lot less from the property. Luckily they handle all the subsidy issues and pay us in $ not 1/3 of their crop as they used to pay Grandpa. Part of selling after the lease is up is to sell when the price might be higher due to all that.
JZ-
Tax laws always change. One would be wise to consult with a trusted accountant on many of the tax matters that encompass land ownership. Some tax deductions are allowed only in active operations, some are also allowed for passive operations (ie- insurance and taxes). Leases can be structured to have landowner participation in certain things such as mowing roadways, clearing field perimeters of tree limbs, etc, that provide the owner a valid reason to own and maintain equipment. Again, I’m not an accountant so I encourage you to work with them on these matters.
I recommend using local tenants who understand local agronomic issues, and also operations that are reputable and appear economically stable.
A well-written lease agreement is equally important. There are many sources for examples of leases.
Many of these issues (leases, taxes, and how to structure the farm entity) vary by state and your individual tax situation as well.
Jenn-
The rise in corn prices we saw to above $7 per bushel in 2013 was due in part to the ethanol boom. This has already worn off and corn prices are now approximately half of this peak level. I think we’ve already seen the majority of the “ethanol bubble” burst, and the market has settled back in.
Accidental farm owner: my brother handles the taxes and rent. We are having a boom due to the corn ethanol subsidies. Last time I visited we couldn’t even drive into the old driveway the grass was so high, and the ticks all over were scary, but I got some nice pics of the old home.
Think we’d all wanted to inherit the farm since it had sentimental value, just lucked out on owning it during the ethanol boom, and will profit well over the initial value if land value stays steady. Embarrassing though to admit in political circles that I also benefit from farm subsidies.
I certainly haven’t enough farm sense to buy MORE farmland, and I’m here half a country away so if I bought any it might be where I live, and more planning to walk my dogs there and rent it out than work it.
Re taxes: I bought a working farmette (6 acres) 20 years ago with house and left the lower tax farm land fallow for a year. Guess they’d never heard of that in TX because they wanted me to start paying nonag land rates plus a fine. However I’d already brought in sheep after the year and they accepted my reasoning. Each year I had a deduction (interesting amortization- chickens of course different from sheep different from horses) until the year we moved when I had a tidy profit selling all our livestock and equipment. Doubt I came out ahead overall, and maybe the IRS didn’t either, but I tried out my small scale homesteader dream for a bit (and find, again with 6 acres but none ag land, I’m not interested in the effort or need to care for livestock when I leave town).
Most of us won’t be buying farmland or living on a farm. Buying land by itself can be costly due to taxes and no rental income. The appreciation may pay off if the area gets developed but that is speculative.
For doctors who are interested in this area, I would suggest looking into other ways to invest in Timber. It has been a stable commodity and tends to pay dividends. Even though we were all supposed to be “Paperless” by now, that hasn’t happened. The easiest of all ways is through a fund or ETF like CUT. Despite a popular saying among parents to their children, money does grow on trees!
WealthyDoc-
I agree that purchasing large tracts of land can be cost-prohibitive for many (or require a large mortgage). However, smaller tracts of land may be a good starting point to get the “snowball” rolling.
ETFs or REITs may be the more sensible option for many of the readers who don’t have interest in owning a physical tract of land, or dealing with all the management issues that come with being a landowner. This option actually makes more sense for those with no farm/rural background or who live in cities remote from available land. However, for me, I enjoy working on the land and want to raise my family in this environment, so it makes sense to be here and own dirt. I can’t hunt, hike, or work on a paper ETF or REIT! 🙂
Again, this article was intended to discuss both the positive and negative aspects of ag/timber land ownership. I’m the first to say that land ownership isn’t for everyone, but for the right people, it can be a great experience!
As a former farm owner I really believe you need a farming rural background to make any money. Most people that I know with farms are not serious farmers. Rural acreage is tough to maintain and the equipment is very expensive. It sounds like Dr Hesler is doing well with farm land and timber. This is an example of invest in what you know.
Hatton1-
I agree, a background understanding of the issues makes a huge difference in both comfort as well as ability to run a profitable operation. Investing in assets you understand and live near enough you can check in on occasionally (and enjoy!) makes sense to me.
Great post Dr. Hesler! I was just wondering what business structure you use for your land rental/timber enterprise? LLC vs sole proprietorship vs otherwise?
Ryan-
There are several ways you can structure ownership…individual ownership, trust (revocable or irrevocable), LLC, FLP, etc.
Every family structure and goals for multi-generational transfer are different, as are tax situations and state laws covering asset protection. I would encourage you to seek advice from a qualified attorney and/or accountant as to what makes best sense for your situation.
This is a great summary of some of the upsides and downsides of investing in farm and timber. I grew up in a very rural area, working on a farm (we mostly grew tobacco). To make this work, I think you have to know something about farming/land management. It would also be really hard to do this remotely. This is the kind of investment where you really need to be present and involved.
-Ray
Ray-
Thank you for the feedback.
I agree that a background knowledge of the issues is very helpful. Remotely managing a property would be tough, and would either best be done with a very trusted tenant or a hired farm manager. The downside to a farm manager is the expense does wipe out a portion of your profit.
The world of agricultural land (and agriculture itself, including timber) seems like it has a pretty high barrier to entry relative to other real estate or alternative investments. I would think for a city slicker such as myself with no practical or life experience with this sort of endeavor, and no family connections to agriculture, it would not be wise to launch myself into timber or agricultural land investment unless it was part of a life change to become more rural/connected with the land. Don’t get me wrong, we live in the mountains, love nature, and spend all our free time outdoors, but there’s just a different culture involved in growing up on a farm or being around farmland.
Awesome article by a an outstanding anesthesiologist! I am one of the many docs he introduced to WCI. So proud of my buddy. Thanks for writing, Dan, and for publishing, WCI!
Don’t have much to contribute other than to say hi to Dan. You were a CA-3 when I was on my away rotation as a med student and were awesome. I’m now a partner at a big group out west. Glad to hear you are doing well. Congrats on your many successes.
Dan is a good friend of mine that I know from residency. Very good article. I’m also involved in farming/land ownership. For me, it’s a lifestyle, not an investment. As Dan lays out, it’s a lifestyle that can pay. Through income and especially by lowering my taxable income in my job as a physician. Last year, I made four times the money in my tax return than I made selling cattle. Most importantly, it’s a good way to raise a more well rounded family. My kids will be more independent, understand what hard work (physical labor) really is, have more self respect, and have skill sets they wouldn’t have otherwise. Their perspective on life and people will be broadened and they will be equally comfortable interacting with an urban professional vs a rural laborer. Bottom line, I enjoy it and believe in it. If I didn’t, I wouldn’t do it. It’s a lot of work for the return you get.
With this comment by Joe and article by Dan I’m just now realizing that the best anesthesiologists I’ve worked with are farmers (although I’m certain the upper midwest living, craft beer loving, financial blogger anesthesiologists are just as solid…). What is it about manual farm labor that makes your intubating a no-chin MP4 patient look like cake?
Dr. M-
Thank you for the kind words. You are an outstanding surgeon, and I miss working with you Buddy!
When you and Mrs Dr A get ready to slow down the global travel, and live out your dream of owning a farm, you know Joe and I will be glad to help you sort it out! 🙂
Joe-
I agree that this lifestyle can pay. Not as well as what we do at our clinical jobs, but it’s a great way to hold a tangible asset that also provides a source of passive income source that will be a nice nest egg in retirement.
Similar to you, I find that I put in far more work on the farm than what I would have to at the hospital for the same returns. However, it is a LIFESTYLE and we are where and how we want to live our lives and raise our families.
I’m sure not trying to convince every doctor to buy farmland…I would not want to be bidding against them at the land auctions! I’m merely presenting one physician landowner’s experiences.
Great post. I have been a long time follower of WCI since residency 4 years ago and purchased the WCI book a few years back. This is actually my first comment. (Dr. Dahle, sorry it took me so long) I can identify with Dr. Hesler being a farm boy from the Midwest who found his way into medicine. My wife and I own a modest 28 acres near our hometown just 1 hour away. We have a good high school buddy that we have a 50/50 crop share agreement with. We have realized some nice tax harvesting benefits by structuring it this way. This was especially noticed when I did taxes this year after purchasing a new Ford F150 last year as a “farm truck”. Just a thought readers of this post would be interested in knowing benefits of crop-share vs. cash rent.
Speaking of investing in agriculture, I’m also now in the process of convincing my wife to allow us to rent out our unused 2 stall barn and pasture to some horse owners. The barn and pasture are part of our primary residence I think we can offset some of our current expenses, gain another passive income source and have the benefit of having someone else (or animal) mow our pasture.
Thank you for the post. Would love to have a farm, but I can’t even harvest vegies in my yard (the critters eat them all).
Anyone else here invest in timber and farmland REITs?
Not unless they’re in the Vanguard REIT Index Fund. Some of the data I’ve seen on timber as an asset class is spectacular though.
Yes, I’ve seen those data too, but I’ve not been real pleased with the REITs themselves (i.e. performance through the GFC). Dunno, small portion in my account. Fun to feel like I own a couple trees scattered around the country.
timber: CTT, PCH, RYN, WY
farmland: FPI, LAND
I grew up with stories of how growing up on a farm molded children into hardworking, honest adults. I might be interested, but my spouse is not. So instead, we just bought a house with 4 raised gardens, 3 fruit trees, and a nice chicken coop. We will start with 4 chicks and some squash and call our farm fantasy fulfilled.
via email:
Long time fan of your website and the dialogue it catalyzes!
While I agree with Dr. Hesler’s view that landholding can provide many lifestyle benefits, it seems important to also mention that all investors, whether than want to live in the woods/corn-fields or skycraper condos, can easily gain access to land holding exposure via select publicly traded companies, such as $FPI, $LAND, $KEWL, $PCH, etc.
While single-stock investing concentrates risks more than indexing, it provides significantly more geographic diversity than direct land-holdings in the same community you practice medicine in. Moreover, it requires much less overhead, provides exponentially more liquidity, and does not have the material transaction and maintenance fees/headaches with direct landholding. For example, I can buy/sell 1,000 shares of $KEWL for $4.95 via Schwab with my smartphone for instant settlement of ~150 acres of northern Michigan & Wisconsin hardwood timberland. Buying/selling a similar amount of land/timber acreage via direct holding would likely take 9-12 months and be burdened with 5-10% brokerage/title/closing fees. I have seen too many doctors burned by fee-heavy private land partnerships/syndicates that cause LPs to start DOWN 5-15% before any chance of breaking even…….
Interesting article Dr. Hesler! My father in law is a retired endodonist, but a farmer at heart. At 71 yo he works sun up to sun down and LOVES every minute of it. He has amassed 700 acres since age 60. The value of his land has doubled in that time. His 4 boys (including my husband, also a doc) love to go to “The Farm” for all of the different hunting seasons…a real bonding experience not captured by a financial spreadsheet.
Finally, as an Iowa girl (although not a farm girl at all) I must say you have the wrong brand of tractor…nothing runs like a Deere!
Learning about the Ins and Outs myself about timber investing after buying 169 acres of pine and hardwood. Need a timber cruise to establish basis of timber value when you purchase. From my understanding when you harvest timber don’t have to pay taxes until you exceed basis. Example; timber value $225,000 when I purchased, so can harvest that amount before having to pay tax on harvest gains.
I’m a Doc in the midwest and have invested in both timber land (185 acres) and crop land (100 acres). I cash rent the crop land for $150/acre which brings in a 3% return for what I bought the land for. Not a windfall by any means but it is an easy way to diversify, I’m pretty much total hands off with this land. I use my timber land for recreation and I work it as a good way of exercise cutting firewood and clearing lanes for passage. I have a big John Deere tractor with a grapple on it to use in the forest moving large logs. Its a lot of fun and good exercise. I have harvested the timber twice (two different stands on the property) over the last ten years. I received around 50K for the last harvest, maybe 5K for the other harvest. The land cost me around 500K. I am able to tax deduct my equipment and depreciate the farm so there is some tax benefit. If you’re not into the great outdoors there are other better ways to invest your money.
A 3% ROI ratio on cash rent:cost per acre is about where the market seems to be at right now. Here is a good resource for seeing both, at least for Indiana:
https://ag.purdue.edu/agecon/Documents/PAER%20August%202017.pdf
Table 4 shows the Cash Rent/Acre and Table 1 shows Cost/Acre to purchase the land. If you do the math and match all factors (region and Top/Avg/Below Avg ground types), you will see a close correlation to this 3% rule.
Timber is a “crop” that I view as a once-a-decade harvest. I took a timber course with my dad a few years ago, and found it very informative (plus it gave us some father-son time together, which was a bonus). It was offered by Purdue University’s Extension Service. I feel that gave me a much better understanding of not only on what was in my woods, but also how to manage the sale, in terms of trees I sold vs trees I left in the woods. I went with a smaller sale for my first cutting in order to purge some of the scrappier trees and left many of the good trees to seed the woods with the next generation of trees that are now coming on (species like white and red oaks, black walnut, and cherry).
If you can get past seeing the woods right after a timber harvest when there are trees cut down and tree tops laying everywhere (it can be discouraging unless you have a long-term vision of how it will look in a few years), a harvest can actually be very healthy for your woods. After thinning some trees out in the timber sale, I’ve seen my other trees really grow at impressive rates. This is attributable to “turning on the lights” with more sunshine, plus allowing for more water to the roots and less competition for nutrients. Thinning a woods can also help reduce disease that can rob you of valuable trees before they are harvestable.
You can work with a reputable consultant forester to help plan the harvest and manage the sale, plan where the logging roads will be made (which can be useful for your own recreation after the harvest when you’re in the woods), and market the timber to more buyers so the purchase price rises in an auction format. They usually charge 10-15% of the sale proceeds to perform this service. If you can find a well-respected, knowledgeable, and HONEST consultant forester to do this, I recommend this route as you can improve the woods for future cuttings.
We also burn wood to heat our home with. This helps me make good use of the tree tops that are left after a sale, and gives me a good reason to get out of the house in the winter time when I’d otherwise turn into a couch potato. They say firewood “warms you twice- once when you cut it and again when you burn it.”
This has been my experience as well. We hired a forester as a consultant for our last tree harvest and it was well worth the 10% expense. I learned a ton about how to responsibly harvest the trees and that you can’t always trust those doing the harvesting to do the right thing. Their motivation is very different from mine. We also use wood from trees that I cut on the land for some great evening fires in the winter. Great exercise. So far I still have all my digits after using a chainsaw for 20 years!
Chainsaws are a great tool, but I do recommend some safety measures for using them:
– Eyewear
– Helmet with face shield
– Hearing protection
– Leather gloves
– Kevlar chainsaw chaps
– Leather boots
– Tourniquet (in the pocket of my chaps)
– Cell phone (to call for help if you have a signal)
We always use this great technique for the 3 times in 20 years we’ve wanted a chain saw for some work: call one of the guys who’ve left us a card (or the last guy if he still has the same number), ponder whether or not they have insurance on themselves, leave the work and chain saw maintenance to the pros, and stimulate the local economy. I’ve been pretty happy otherwise with ax, bowsaw, and benign neglect. And this week they’re using a backhoe not a chain saw; another device I sometimes use to improve the local economy/ job market; when needed on our place.
Looking at the larger topic of agricultural investing in general, what about a crowdfunding platform like HarvestReturns.com?
That’s pretty cool, making an asset class that hasn’t been terrible accessible in the past a lot more accessible.
Never have invested in farm land but have though about it a lot over last 10 years. My biggest obstacle was how to find the land? There is no realtor.com of farm land. What do you suggest?
There are not a lot of national centralized listings that I’m aware of. Many properties are advertised in local newspapers, craigslist, or by word of mouth.
I would suggest narrowing down the geographic area where you wish to purchase land, and then check local realtor webpages regularly. You can also contact them directly and ask to be contacted when a property comes up for sale. Many times properties sell before they even make it to a formal public listing.
In addition to checking with local realtors, I would recommend the following sites for some leads:
https://www.realtor.com
https://www.whitetailproperties.com
http://www.mossyoakproperties.com
https://www.landandfarm.com
http://www.farmlandsearch.com
Please mention the different concept of active versus passive farming. Big tax implications. Active farmers can write off losses on the schedule f against their doctor income. Passive farming income limits losses to the farm income only. Much less valuable. Active farming is an awesome write off for high income bracket folks. You really need to know the difference between active and passive. Good luck.
A lot like real estate professional status that way.
I can’t stress enough the relationship between an tenant and landlord as well as the power a bigger operator in the area has over influencing rent.
I’ve had the same tenant in my ground over 20 years. It’s straight cash rent and they take care of fertilizer etc. and mow the road, in other words good tenants. I had to leverage a $40 an acre higher offer from someone else with them to get a rate that better reflected the value of the land. My dad had them at the same lower rate forever and I couldn’t ignore the difference. In all honestly I didn’t want them gone but the math was undeniable. The big operator in our area snatches up everything and so it is an owners market but the ceiling is still there.
Competition for land can be influenced quite a bit from bigger operators whether local or out of state but the better rents come at a price of tenant instability and abuse of the land (not replacing mineral content, etc) if not careful.
Combine these factors with increasing pressure from urban development and transitional land around my area has seen crazy rises even with the lower crop prices. I think if you’re not a producer that’s where you’ll find better rates of return but you’re really buying and holding until the next expansion because what you pay for it would be hard to justify what you’d make with it renting or growing grain crops.
We have a large Amish population in our area that drives land prices as well. This is where I think speculation can work as the economics of their world are quite a bit different and the land they buy tends to be around their specific communities and therefore they often crowdsource a bigger purchase. It is also usually cheaper per acre and you can make the buy and hold numbers work a bit easier.
Look up the auction sites in the area your curious about and then research the ending bids to get an idea of what you’re getting into.
Thanks for all the great info and site!
I am looking for a investor to buy a farm we have been Custom Farming for 10 years it is coming up for sale don’t know if you got into that or not please let me know