Investing in Canadian Farmland

One of my core believes when it comes to money, is that you have to invest your money and make it work for you. I don’t want to work for money for the rest of my days – at some point, I’d like to get the money working for me so I can relax a little. Wouldn’t it be great to only work if I want to? To have a pile of money in different investments that produce a healthy return?

This is one of the reasons why several years ago we’ve decided to set money aside and actively invest them. Before that, we would just save money in savings accounts – but at some point it started to look a bit like hoarding – sure it was nice to have it, but with whopping 1-2% returns on our savings, we were basically breaking even after inflation. We could put money into stocks and mutual funds, but I’ve personally had bad experience with mutual funds before (more on that later), so we started looking into alternative investing options. Some interesting opportunities were discovered – one of them was investing in Canadian farmland (mainly Saskatchewan).

Investing in Canadian Farmland

Investing in Canadian Farmland

Why would anybody think of investing in Canadian farmland?

Well, there are several reasons for it:

  • Investing in farmland provides an excellent security – it will never go to zero. Stocks can go to zero. Banks can go bankrupt. But farmland will always be worth something, it’s a real hard asset, and the value will always be there.
  • Supply of farmland is decreasing which puts an upward pressure on its prices. For example, Wisconsin lost almost 500,000 acres of farmland between 1997 and 2002.
  • It is fundamental to life. We need farmland to survive because food comes from farming. Other investments – for example gold or silver – might sounds like solid investments, but at the end of the day you can survive without them just fine – but try surviving without food!
  • Investing in Canadian farmland represents stable, income producing assets that are going up in value and serve as an excellent hedge against inflation. Average annual return to owners of Saskatchewan farmland is around 10% (1972–2003).

What is farmland worth?

 

Farmland values have been steadily going up across Canada and US. Recently, in Canada they’ve reached new record highs. The main reason for it is diminishing supply and increased pressure on production. In other words – people need more food, but no new farmland is being made. In some areas, the prices per acre doubled in less than 3 years!

Here’s a picture of farmland values per acre in various states and provinces:

Investing in Canadian Farmland

Investing in Canadian Farmland

As you see, farmland prices in Saskatchewan are still low comparing to other provinces and various states – but they’re going up in value rapidly. In 2012, farmland prices in Saskatchewan went up by almost 20%.

How does one invest in farmland?

It comes down to basically two ways:

  1. Buying physical farm and leasing it out to a local farmer who will pay you a rent payment out of his business. One blogger that I read on regular basis did exactly that! He bought a farm (on credit which I can never understand, but hey…), leased it out to a farmer, and now receives monthly payments. It was very interesting to follow his adventure – from scoping out the location, to putting down the deposit, and to finally getting his first check in the mail. But while it is certainly exciting, this approach is very hands on, and you basically have to score a direct hit – buy an excellent farm, find a reliable farmer, and pray nothing bad happens. It reminds me of absentee landlording and how tough it can be.
  2. You can buy into a private investment fund that specializes in investing in Canadian farmland. That’s exactly what we’ve done a while ago. AgCapita is a Calgary-based investment company that raised $30M and bought 45,000 acres across Saskatchewan. We’ve limited our investment to $15,000 for now, but looking into buying more shares sometime this year. To be honest, I like this approach better – while it’s certainly doesn’t have the same excitement as owning a physical farm, I can sleep well at night knowing that a team of professionals who know everything about investing in Canadian farmland work hard for me by investing my money – they buy good properties, rent them out, and make sure returns are there. Their portfolio is worth close to $50M by now and annual compound returns reached 20% last year!

Some interesting facts about farmland:

 

  • Saskatchewan contains almost 40 per cent of the farmland in Canada, close to 64M acres.
  • Saskatchewan farmland is of the highest quality with great access to water, and with warming climate its productivity is expected to rise even further.
  • Saskatchewan farmland prices were held down artificially until recently with restrictive laws – and now they have a lot of catching-up to do to reach other provinces.

I’m Financial Underdog, and I could never be a farmer. Something about waking up at 4 am just doesn’t appeal to me…

Family Money – Combined accounts vs. Separate accounts

From my experience after talking with people or reading about personal finance online, there are basically two approaches to how people run family finances when it comes to family money.

Disclaimer: I`m talking about management of family money – if you`re in a boyfriend/girlfriend situation, or just recently started living together this doesn’t necessarily applies to you. I’m talking about people who live together as a family, in a serious relationship, and who may or may not have kids together.

Combined Finances – when family has a number of joint accounts (checking, savings, credit, etc.) and run their affairs (financial that is) accordingly. They pay expenses out of joint account, deposit paychecks into their joint account, buy things with that money, and save for the future by putting money aside into their joint savings account.

Separate Finances – each partner has a separate checking account where they deposit their paychecks and pay for their things out of it. Sometimes they have a joint account for family expenses such as car payments or house payments where they transfer portions of their paychecks. Most likely they have their own separate debts (school loans or credit cards) which they pay with their own money. They might also have a joint savings account where they deposit agreed-upon amounts every month. I’ve seen some extreme examples when people run their financial lives completely separate even though they’ve been living as a family for years.

Family Money

Family Money

Now, personally I don’t understand how people live together as a family and don’t combine their finances. There are huge upsides to combining your finances and very little downside.

Benefits of running combined accounts:

 

  • Clarity. Having all accounts as joint accounts provides clarity to your finances. At any given point, you’ll know exactly how much you have, how much you owe, and what is your current cash flow. Doubling the number of accounts only muddies up the water and makes things difficult to see, let alone follow some sort of plan. Family money is complicated enough – why make it even more complicated by doubling number of accounts.
  • Ease of access. If my wife calls me and tells me that our Visa account is due tomorrow and I need to pay it, I have instant access to our account. If there was a problem with one of the transactions, call center folks wouldn’t even talk to me – because my name isn’t on the account.
  • Single plan of attack. When your family money are combined, it’s very easy to work out a plan of attack. How much do we want to have in the future when we retire (as opposed to how much I have to have and how much you have to have)? How much debt we have vs. how much you have and how much I have? The plan of attack becomes very simple – as opposed to doubling every single task and mudding the water.
  • Commitment. I think this is by far the largest benefit – when people combine their finances and become a family, they commit to certain goals (saving, investing, etc.), agree to specific rules (how much to spend and on what items), and become one unit of the society. I completely miss the point of starting a family and living separate lives financially – with separate goals and plans of attack. What, you miss feeling independent? Hate to break it to you, but that’s what being married is – commitment to your family. Family isn’t a joint partnership with independent partners.
  • Accountability. My wife and I are accountable to each other for our finances. If we agree to a certain spending pattern, we make sure we stick to it. Having family money separate would destroy any type of accountability we have – I’d have to be accountable to myself only. That’s what makes joint accounts great – sense of accountability for your family finances.

 What is the downside of combined finances?

 

Basically, after living with my wife for almost seven years, I can honestly say there’s only one downside – buying presents for each other. If few days before her birthday she looks at our online budget on her phone or computer, she might see something that will give away the nature of the gift I’m buying – and same for me. Simple solution? We just tell each other before we buy any presents and promise not to check accounts online prior to gift giving. Easy as that.

So, call me old-fashioned (even though I’m in my 30’s), but I don’t believe in keeping family money separate. From family dynamics, from financial perspective – it makes sense. Combine it all, what’s yours is mine, and what’s mine is yours – there’s no other way in my opinion. I mean, there are – but they don’t make sense to me.

I’m The Financial Underdog, and I like clarity and simplicity.

Emergency Fund

I think one of the most important accounts anybody should have is an emergency fund. Emergency fund isn’t an investment – it’s just a pile of money sitting in your savings account – far away from you – in case you need it. We’ve had it for the last 5 or 6 years, and let me tell you – not a lot of things give you the same peace of mind as fully funded emergency fund will give you. My wife repeatedly told me that she feels in peace when she knows that most major problems we might have down the road can be solved by simply accessing our emergency fund.

2013-05-27-Rainy-DayWhat is it for?

Emergency fund is your old-fashioned rainy day fund. Let’s face it, things happen. You want to be prepared for it – and money makes a lot of issues go away without too much stress. For example:

  • You lose your job and need to find another one – in the mean time you have means to pay the bills.
  • Transmission on your car goes out and it needs to be towed – your emergency fund will cover the repairs.
  • Your car gets stolen and you need to cover the deductible.
  • Hot water tank goes out and needs to be replaced as soon as possible.

What do average people do? Pull out their credit cards if they don’t have enough money or borrow money from pay-day loan scam artists. What is the proper way to handle emergencies? Using your own money and tapping into your emergency fund.

What is NOT an emergency?

  • Being short on cash during Christmas shopping. Seriously, everybody knows when Christmas comes – plan for those expenses in advance, and if you don’t have enough money – well, suck it up.
  • Emergency furniture replacement. Just because your in-laws are coming and your couch looks like it was used for target practice by Somalia’s militia – doesn’t matter. Don’t dare touching it for frivolous expenses.
  • Kids need new clothes for school – once again, not exactly an emergency.

How can emergency fund help your financial life?

Having emergency fund has multiple benefits which would help an average family to get ahead. First of all, if you use your own money for emergencies, you don’t pay interest associated with it. If you were to pay for new transmission with your Visa, you’re paying 19%+ in interest or even more with pay-day loans. Second, emergency fund will help you save money – if you have an emergency fund, you can increase deductibles on your car or home owner insurance – which will bring down your premiums considerably.

How do you set one up?

  1. Decide how much you need. It’s usually recommended to have 3 to 6 months of expenses. If you’re a bit paranoid, bump it up to a year. In our house, it’s 4 months – roughly $10,000 dollars. We only used it two times so far – once our car broke down and needed a new alternator (along with tow all the way from Merritt to Kelowna), second time our dryer broke down and needed repairs.
  2. Decide the rules around using it. If you’re married, get your partner involved in this discussion – what it’s for, what is it not for, etc.
  3. Set it up as a savings account – I recommend ING Direct as you can transfer money between your main checking account with ease, and you can also write checks out of it. The interest paid to you will be minimal, but once again, it’s not an investment, it’s an insurance against future rainy days.
  4. Start small – put a few hundred in your emergency fund, and see how it feels. Set a goal to fully fund it by certain date, and keep putting money away into it. Once you have it fully funded – enjoy life with less stress about your financials.
  5. Evaluate your fund every 6 or 12 months – what if your expenses went up? Might need to beef it up.

Well, enjoy your race towards the weekend (only 2 days left!), and see you later. I’m The Financial Underdog, and I’m in need of some sort of sandwich…

I am kind of a big deal …

This is going to sound completely silly.

Few weeks ago, when I was rushing to complete tax documents for me and my wife, I discovered we’re missing few tax forms from one of our small investments. No big deal, but kind of annoying. So, I called up my financial advisor asking what should I do. He said not to worry, and promised to follow up. So, I went back to doing whatever it is I was doing.

All of a sudden, my phone rings. I pick up, and a secretary on the phone says:

Her: – Oh, hello. If you have a second, I’ll connect you with Peter So-and-So, chief executive officer of Big Real Estate Capital Inc.

Me: – Oh……..go ahead.

Peter So-and-So: – Good afternoon. Just wanted to follow up with you regarding your tax documents. Just so you know, we had a bit of a mix up, my secretary will courier the documents to you by tomorrow morning. My apologies, call me with any other issues, and if you are ever in Calgary, stop by our office.

Me: – Oh…….uhmmm….Thank you very much, Peter!

And although it was just concerning some tax documents, I felt completely bad-ass. I felt like Gordon Gekko himself called me. Coming from very humble beginnings, I could never imagine that a CEO of a company would call and talk to me. After all, I’m just one out of hundreds of investors in this particular company, yet I get his undivided attention for few minutes.

Anyways, like I said – totally silly. But kind of cool!

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This message is brought to you by The Financial Underdog, and sometimes I feel like a big deal!