Land purchase decisions should be part of long-term plan

There can be much variability in land prices depending on location, but one trend is clear — it’s becoming more expensive.

Will the trend continue? How high will land prices get?

There are lots of opinions, but obviously nobody knows for sure.

The question is relevant to buyers and sellers. The recent gains have triggered some owners to sell, be-lieving values have peaked or are close to their peak. Others are taking the wait-and-see approach.

Common ideas associated with land purchase decisions include:

“We’re getting a return on investment due to the increasing value.”

“What other investments would yield the return we’re getting on such a stable investment?”

“If we don’t buy the land, it will never come back on the market.”

“They’re not making it anymore.”

It’s far better to be prepared for the opportunity when land becomes available than it is to be reactive. A sound strategy around land acquisition that is tailored to a farm’s specific situation will increase the likelihood of a successful outcome.

If the goal is to get a return from the capital appreciation, the issue becomes how to realize the return. The land must be sold to crystallize the gain.

However, most farmers do not like to sell land.

If the strategy is truly to realize a gain from capital appreciation, an option may be to look at buying recreation property near a resort or property close to a development area near an urban centre.

There can be many reasons why land purchases are a farming decision:

  • The farm family may have a longer-term strategy of owning land that will be rented in retirement to generate a retirement income stream.
  • A farmer may want to increase the percentage of owned acres compared to rented acres.
  • Succession planning often results in a need to increase the acreage base, which could be in the form of owned acres.

There are instances when competition for land is so intense that it becomes a “buy at all costs” exercise. Land prices in these situations surpass any ability for the land to pay for itself.

Financing these purchases requires careful consideration. If a large amount of cash is going to be used, farmers should determine how using it will affect working capital and cash flow.

Farmers who finance larger amounts should analyze debt servicing abilities and monitor their debt to equity ratio.

One strategy could be to treat owned land as an investment portfolio.

Managing the portfolio would include ways to improve or expand it. If increasing the size of the portfolio is the objective, then acquiring additional land is a straight forward decision: “do we buy it or not?”

When the strategy is not to increase the size of the farm, then it is important to ensure that superior quality land is purchased. Every additional acre bought would be offset by selling lower quality land.

There will likely be a cost differential, but the result will be a higher quality, more productive land base. More productive land generally makes more money, which in turn offsets the cost differential.

Land prices and decisions around buying land make for interesting discussions.

Everyone will know five or 10 years from now what they should have done.

In the meantime, putting strategy and parameters around the discussion will help make informed decisions.

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