Building Wealth with Farmland
Farmland can be a terrific investment. As many of us will know, investing is like playing chess in the real world and the stakes are high. While there are certain skills and abilities that are highly prized within the investment markets, conviction and action will always be required.
Conviction, because it helps see us through short term price and market volatility, while the necessity of action is self-evident. I only emphasize it because there are too many scholars or wise teachers without the experience or the confidence to act.
Lately, celebrations and champagne have been had for crypto and stock investors. Today I want to share a success story of someone who got into farmland in rural Canada and cashed in big. Once we gained that conviction he acted and later reaped the rewards.
Introducing Liquid
Twitter is my preferred social media platform of choice. While it is not the most popular, as a writer, I’m sure you can see how this appeals to me.
I asked my followers if any had a terrific wealth building story or tool that was a bit uncommon but yet powerful. It did not take long and I was struggling to pick from the litter.
The one that really caught my eye came from Liquid Freedom 35 who invested big into farmland. With investments going so virtual and online, it was refreshing to pick up something real.
Tell us About Yourself?
I’m a graphic designer in my mid 30s. I started investing in my early 20s and built up a 7 figure investment portfolio. Today I make more passive income from my investments than I do from my job.
I didn’t take any shortcuts to become financially independent. However, I did implement practical mental models to speed up the wealth creation process.
Tell us More About Mental Models
Developing a strong understanding of myself and building a positive relationship with money helped tremendously. Internal conflicts are often the greatest hurdles to overcome in any financial journey.
Adopting an abundance mindset and creating the right frame of mind kept me motivated, committed, and focused on my goals for 13 years straight.
After Mental Models, What Came Next?
The next part sounds simple but is not always easy to follow through. I basically mimicked the strategies and actions of those who are already wealthy.
Financial success depends more on the methods and principles you practice than how hard you try. Good strategies create wealth. Great strategies create even more wealth. All the strategies I use have already been vetted and proven to work. I have gained priceless knowledge by learning from experts such as Warren Buffett, Ray Dalio, James Rickards, and many others.
I’ve been shadowing these financial specialists for years – reading their books, studying their next moves, and watching their interviews. There’s no reason for me to reinvent the wheel. These gurus have already shared their wisdom with the world through their writings, interviews, and other works.
Do You Have an Example?
For example, a highly valuable skill used by many successful investors is knowing how to value assets. This allows you to subsequently pick out any undervalued ones, giving you a margin of safety.
Not selling your winning investments too early is another important lesson. If your reason to own an investment hasn’t changed, think twice before selling it. Otherwise you might lose out on future gains.
Another mental model is thinking in first principles. You have to critically analyze situations from their fundamental components and come to your own conclusions based on your experience. Do not rely on other people’s testimony.
Finally, only take action on asymmetric bets where the odds are in your favor.
What Tool Has Given You the Biggest Results?
But out of all the tools I’ve learned to use, the most useful one was financial leverage. By using other people’s money I was able to increase my investment returns by many times. This is the primary reason I was able to earn 20% to 30% annualized investment returns for over a decade.
Using leverage is a double edged sword where the losses can multiply as well. That’s why it’s important to look at investing holistically.
Can You Show Us How Leverage Worked For You?
For example in 2013 I purchased 310 acres of farmland in Saskatchewan, Canada. This turned out to be one of my most successful investments.
I had determined that Saskatchewan farmland was underpriced compared to its neighboring provinces due to a relatively new change in government policy. I rented the land to a farmer for 7 years, and ultimately sold the property in 2019.
By that time property prices had caught up with the fundamentals. I sold the farm for 40% more than my purchase price. But thanks to using 8x leverage my actual return on invested capital was 268% after expenses.
Breakdown How You Approached Buying Farmland
Here’s a breakdown of my thought process of the entire situation. First, I gave myself a margin of safety by identifying an underpriced asset class. Then I calculated the expected return to make sure it had viable upside potential with minimal downside risk. Once I determined this investment had a high chance to succeed I boosted the expected returns with calculated leverage. And finally I gave myself a long term, 7 year horizon, to reduce short term risks such as price volatility.
I use the same principles when investing in residential real estate, the stock market, and in options trading. Building wealth is all about understanding what you’re buying, why you’re buying it, and controlling risk.
Image Caption: 2013 land title purchase for $172,500 CAD for 150 acres. In 2012 Liquid had purchased the adjoining farm of 160 acres. For simplicity, we’ve cut out some of those details. If you want to read more, see his original blog post for full breakdowns.
I’ve been very lucky to have started my investment journey in 2009, from the beginning of a long bull market. Prolonged low interest rates have also helped me keep leverage costs down. And having insightful role models to learn from has certainly made my life easier.
Maybe I can pass on some of that knowledge to others. Despite many years of investing experience there is still a lot more for me to learn. I certainly don’t have all the answers. But I hope others can learn from my experience and use it somehow to improve their own personal finances.
Farmland Profit / Loss Chart
Image Caption: Income is comprised of rent from farmers while expenses include tax and interest payments. As there is no structure on the land, insurance is not required.
The Sale
In 2019, Liquid sold the combined farmland to an investor in Ontario Canada for $445,000.
Capital gain = sold price – purchase price – transaction costs
Sold price: $445,000
Purchase price: $322,000 (2 Buys: $172,500 + $149,500)
Total commissions and other transaction fees: $26,000
Capital gain = $97,000
Finally the return on investment can be determined using the following formula:
ROI = (Net gain from investment / Cost of investment ) x 100%
Net gain = $97,000 capital gain + $10,000 net operating profit
Cost of investment = $40,000
Return on Investment = 268%
Land & Real Estate Investment Analysis
It is no secret that real estate has minted more millionaires than any other asset class. I believe this is because of three factors: First, the need is perennial – everyone needs a home to live in, and with farmland, we all need to eat. Second, supply in certain markets or areas is constrained or limited. Third, leverage is often required to purchase the asset. The combination of these three factors come together to create wealth for the investor.
Farmland is Unique
Image Caption: Both US and Canadian farmland prices rise nicely
Canada Farmland vs. Canada Stocks
The Toronto stock exchange (TSX) offers the closest comparison against Canadian farmland for investment purposes. As we see below, arable farmland has outperformed the TSX most years while never going negative.
Image Caption: Annual farmland returns have been positive for each of the past 10 years.
How About US Farmland Prices?
In the right market, US farmland prices have performed even better. Iowa is the stellar example. In fact, if you think the demand for food in the future is going to increase then investing in farmland could be the perfect play for you.
Closing Thought
Huge thank-you to Liquid for sharing with us today and increasing our investing knowledge. Too many times we focus on stocks and forget about the other opportunities out there. Arable farmland offers a terrific opportunity to build wealth.
Bonus Material
If gold is the oldest form of money, then farmland is the oldest investment. Grab a handful of dirt, let it sift through your fingers, look out over the horizon, and you get it right away. While we will not all choose to invest in arable farmland, we can all learn from this investment vehicle and apply it elsewhere.
Demand for farmland will always exist and grow with an increasing population. As bio-innovation increases our life expectancy, this will further increase demand for food.
Supply of arable farmland is constrained and can only be increased through abnormal efforts. I also fear that climate change will reduce the current supply. I hope I am wrong.
The investment can yield income and pay the owner in real food and cash when sold on the open market. We can also see innovative products which increase the actual yield from each acre.
Leverage will almost certainly be used to finance the purchase and lenders will fight over who gets to give you the money.
Why Don’t More Do It?
While writing this article with Liquid this question circled in my mind a lot. I think in the end it comes down to how difficult it is to access this market and how infrequently it is spoken about in the financial news and social media. This all said, I believe with a little effort, buying farmland isn’t more difficult than purchasing a new home.
Getting Started
If you are interested in getting started, please reach out to Liquid, his contact information is at the start of this article on his profile card. You can also get in touch with a real estate agent who specializes in farmland. They will be listed in your local area with a simple Google search.
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2 comments
This was one of the most interesting strategies I read initially on Liquid’s blog! It was so unique like many stuff he does.
Congratulate me for starting using leverage through Personal Line of Credit! It is the beginning of a long journey I suppose.
So THIS is the big reveal that you’ve been hiding out from us on Twitter!!
I would be way too careful buying an asset class that i don’t understand. I don’t necessarily mind not understanding the underlying business but not understanding what drives value / what moves the prices would be a little too scary for me to back up with dollars.
Great that it worked out well for you, Liquid! You would be right in that it’s not really talked about a lot in the financial media.. i didn’t even know this asset class existed.
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