Pathways to farm ownership through real estate
Is it your goal to own your own financially viable farm one day? Or are you currently farming but really can’t see any way ahead to be able to own land of your own?
There are many pathways to farm ownership, and using some really creative ideas is becoming increasingly important as the goal seems increasingly difficult to attain.
The traditional pathway to farm ownership was from farm employee, to contract milking or lower order sharemilking, to 50/50 sharemilking, to farm ownership – as in a ladder where one step needs to be climbed at a time. The pathway has become increasingly difficult in recent years. There is a marked decrease in the number of sharemilking opportunities as farm sizes increase. Also there is an increasing trend for farm owners to employ managers and contract milkers, as they are able to receive a better return on their investment if they own their own livestock and receive half the income. The lack of sharemilking positions and the high entry price into farm ownership has changed the way successful young farmers are thinking about their goals and how to achieve them. The single ladder has morphed into something resembling a rope net obstacle course, where there is flexibility with alternate routes and perhaps even multiple choices can be chosen at a time.
There is no one size fits all anymore, and it is good to be aware of how others are successful in using real estate in various ways to achieve their goal. Investing in smaller parcels of real estate along the way can be an option which wasn’t included in the traditional pathway.
We are increasingly seeing farm employees or sharemilkers owning residential rental properties in a bid to get on the property ladder and keep up with inflation. Some good wins have been made due to being in a compulsory saving situation, and the recent economy has resulted in very good capital growth in many instances.
Perhaps ownership of a beach property satisfies lifestyle needs and accumulating wealth through property ownership at the same time.
Another option includes a sharemilker in a stable contract purchasing bare land to use as a grazing or maize block. This land eventually becomes a deposit on a dairy farm. Alternatively, the sharemilker decides to retire, selling the herd to pay off existing debt and building a new home on the property.
If available, leasing a farm with an option to purchase can give stability, as a young family is able to put roots down in a community before needing to commit to the purchase.
Equity partnership, where the silent partner contributes most of the capital for the land is a common answer. Ensure the goals of each party are aligned, and there is a shareholder agreement, with an exit strategy. Open communication between all parties can result in a very successful relationship.
Another option is a sharemilker who purchases their own farm and employs a manager on it, while continuing with their existing contract. The cashflow from the sharemilking contract can help in the early years of farm ownership, which are often financially very stretched.
The choices that are made need to be tailored to appetite for risk and amount of stress that can be handled. Property values do fluctuate. Purchasing at the top of the price curve and needing to flick off quickly can defeat the purpose of owning the property in the first place. Be aware of the taxation rules due to the Brightline test. Although not applicable for farm land, it is likely to apply when purchasing residential property, which is not the main home, if then sold within two years.
For more information on accountancy implications of owning real estate please contact CooperAitken Ltd in Matamata, Morrinsville or Thames.