The battle between land development and attempts to control urban sprawl has many caveats.
We can appreciate both sides of the argument but believe strongly in protecting agricultural land and green spaces from development.
With many investor eyes on Canadian Real Estate and hundreds-of-thousands of people moving to the GTA every year, we thought it important to write an article that focuses on investing in rural real estate in a way that preserves agricultural land and green spaces.
Notable Statistics and Particulars
Large Acreages and Farms:
- Farmland Prices as a whole, rose 8.4% in Canada in 2017. In South Western Ontario specifically – where the vast majority of farms are located in Ontario – there was an increase of 9.7%. Bringing the cost per acre up to $12,730!
- Interest Rates were increased twice in 2018. Over the year, it will be interesting to see how much of an impact this has had on farmers’ abilities to expand.
- NAFTA Trade Agreements could adversely impact the economic viability of supply-managed farms. In Canada, a lot of farmers operate under a supply management system. In short, this system allows farmers to act collectively to negotiate price and adjust production to meet consumer demand. Since these farmers make up a large percentage of land purchasers, it is possible there will be an impact on land values with changes to this agreement.
Small Acreages / Country Homes:
- Average Sale Price of .5 – 1.99 acres in Southern Ontario is ~ $600,000.
- Average Sale Price of 5 – 9.99 acres in Southern Ontario is ~ $800,000.
- These prices have almost doubled in the last 10 years.
What Are Your Options?
Now that you have a bit of an idea of where values are … you might be asking why and how the average person could invest in farmland or rural real estate in general.
Like Gold, farmland is looked at as a hedge against inflation.
As food prices rise, so should the value of the land to produce the food. Beyond the hedge however, it also offers the possibility of income for investors.
Option 1: Purchasing Farmland Directly
Owning farmland with no improvements (i.e. buildings or infrastructure) is going to be your simplest course of actions. Here you can avoid cash out of pocket for maintenance and repairs on buildings.
Essentially this is a buy, hold and rent scenario. Something you may be familiar with if you have invested in regular residential real estate.
On the other end of the spectrum, you may want to pull the trigger and become a full-time farmer. There are too many types to mention in one article. But, whichever you choose – you’ll need to look at it as a business like any other. One with specific taxation rules as well as advantages that can be useful if implemented properly.
Having a good accountant versed in farming and agriculture will be a must!
Option 2: Farm Fund Investing
As global food demand and personal incomes increase around the world, the demand for high-quality agricultural products has been projected to grow.
In 2016, the agriculture and agri-food system generated $111.9 billion of gross domestic product, accounting for 6.7% of Canada’s total GDP.1
Buying a farm may not be for everyone, but enjoying a piece of this revenue might be.
For those who like the idea of investing in farmland but don’t want to directly purchase the real property – farmland funds could be the way to go.s
This is a popular option with Investors that want to park capital into something tangible. Instead of going it alone, a group of investors pool their money together to buy the asset (farmland) and then, put simply, rent the land out to farmers.
Option 3: The Part-Time / Rural Resident
Generally, a part-time farmer often purchases a farm with a house to live in that either comes with other existing infrastructure – such as barns or sheds – or plans to build what is needed.
The aim is to have a small farm business for generating extra income while also living on the property. This option is typically for investors who have a passion for farming.
A part time farmer might use a small section of the property to grow fruits or vegetables that they then sell at a local farmers market. Others might raise a few beef cattle.
To further income, some choose to lease out the remaining acres to a farmer.
Unlike a full-time farmer, a part time farmer’s main source of taxable income will NOT be generated from farming. However, there are some interesting property and income tax advantages to being a part time farmer.
Again, a good accountant versed in this space is key!
From an investment standpoint, the same land value aspects mentioned earlier still apply.
Option 4: The Hobby Farm or Residential Country Home.
A hobby farm is a small-scale farm that someone would own for their own personal enjoyment (as would be a country home). Most likely it would be situated on some acreage, allowing the owners to use the land for planting their own vegetables, raising chickens or whatever their preference may be.
Appreciation would be your main investment focus for this options.
As the label “hobby” would imply, unfortunately, hobby farmers are not allowed to claim any farm expenses as income tax deductions.
That’s why it’s important to avoid having the Canada Revenue Agency classify you as such if you ever intend to make a full or part time living from your farm. One more time… ACCOUNTING!! 🙂
When it comes to buying an acreage you will want to have an idea of what your intentions are for the property and if the property will allow for it. Zoning will be key here!
Do your research so you are not limited to gardening should you have bigger plans like keeping livestock on the property.
A Note on Financing
Financing Farm Land
Naturally, agricultural financing is different from residential financing.
Shopping around for different lenders that specialize in farms will be integral.
Farm Credit Canada (FCC) is a big lender. Although they may not have as competitive a rate as smaller lenders, they do offer useful auxiliary programs like financing farming equipment.
However, it is advisable to research your options with traditional big banks, smaller lenders and credit unions as well.
Financing The Hobby Farm or Country Home
Generally speaking, as long as you don’t plan to generate income from or farm the property, country properties and rural residences are financed in the same way as a home in the city
As a general rule of thumb, anything 10 acres and under (not intended for farming or income purposes) should qualify for residential lending.
If the hobby farm or country home you are interested in purchasing is on 15 acres, the bank may only approve the home + the ten acres, leaving you to come up with the amount for the remaining 5 acres.
Financing isn’t an exact science. Different lenders will look at different properties in different ways. So it important to shop around or have a good mortgage broker with knowledge of this type of financing.
We’ve only scratched the surface with this article. Hopefully we’ve expanded your ideas about the value of land and your options for investing in rural real estate.
- Statistics provided by Realtors Association of Hamilton-Burlington and the Toronto Real Estate Board.