Monday, March 30, 2009

The Farm as Investment

Sinking a significant chunk of money into a piece of real estate is obviously an important investment decision. In my case, without getting too specific, my share of this wound up being more than a year's salary, and that's just a little over half the value of The Farm. I have other, more traditional investments, too. My wife and I own our home in suburban St. Louis, and have a 30-year mortgage like a lot of other people. We have IRAs, annuities, and a modest portfolio of stocks and mutual funds.

Along with all the rest, I've been interested in real estate as an investment for years, but wasn't sure how to begin. I tend to over-analyze this kind of thing, and sometimes that means I am slow to take the plunge. Of course, given the economic thrombosis since the middle of 2008 or so, it's probably a good thing I didn't borrow a bunch of money to flip houses or buy apartments a year or two ago.

But I thought about it! I have just enough hands-on experience working on my own house that the idea of fixing a place up for re-sale doesn't scare me. My wife and I have finished our basement, done electrical wiring, hung drywall, installed new flooring, sweated pipes, and so forth. But I would not consider any of those chores as "hobbies," and I could never convince myself that the return on that kind of investment would be worth the trouble in purely economic terms. In other words, I think the decision to become a landlord is a lifestyle choice we weren't ready to make.

On the other hand, I thought that farm real estate would have a number of potential advantages. If you don't over-pay in the first place, it seems to hold its value fairly well. It doesn't "sizzle" and appreciate by double digits every year, but it's not prone to boom-and-bust cycles and the kind of bubbles that make "hot" real estate a risky venture. Farms can be a source of rental income, if you don't want to raise your own crops and livestock. Some farms (like ours, but that's another story for later) are enrolled in conservation programs which provide a guaranteed income to cover taxes and minimal management costs, even without actually "farming" in the usual sense of the word. And some rural land is attractive as recreational property.

So we had to do some thinking about what we expected this land investment to do for us, and how active we wanted to be on the property. We weren't ready to quit our day jobs and become farmers (although that seems tempting some days). On the other hand, it didn't seem to make sense somehow to own a piece of land just so that someone else could pay me to farm it. I wanted the property (a) to actually be of direct benefit to us, and (b) not to decrease in value over time. There's no way to guarantee (b), except perhaps to avoid over-paying in the first place, and to buy land which will probably not completely lose its value.

My first criterion (that the land should benefit us directly in some way) is a little more complicated. It meant, for instance, that the property would have to be within reasonable distance from where we live; I figured it would have to fairly easy to drive to the place for a weekend. This is actually what made us look at farms in the first place. Other kinds of "direct benefit" real estate might be a vacation home in the Rockies, or a cozy flat in Europe someplace, or a time-share in Cape Town.

But none of these would be easily accessible very often. We didn't want to own a place we only got to use once a year. In our part of the country -- far away from mountains and beaches -- it seemed we might find a place which could be a weekend getaway year-round, and also provide a little private hunting ground for me (more about the hunting angle in another post). We are not really bass-fishing and water-skiing people, either, or we might have bought a place on Lake of the Ozarks. The "direct benefit" consideration pointed us toward land which was not entirely devoted to crops or pasture, since we weren't interested in working it ourselves intensively or simply renting it out to another farmer.

What's left? And how to find the "right" place? More on that later.

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