How to Buy Your Dream Farm

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How to Buy Your Dream Farm

Having a place to hunt with your family is one of the great advantages of owning your own land. Here is a buck our daughter shot on our farm back in 2012.

I bought my first farm when I was 32 years old.  In truth, I bought only part of a farm.  The land was owned by an S Corporation (large partnership); there were 13 other owners.  The piece was big, but land prices were low back in 1995, so each share of ownership was not super expensive – except to me – someone who had exactly $12,000 of life’s savings.

How I made it 32 years and still only had $12,000 to my name is another story, but what I did with that $12,000 is the real topic of this article.  Over the course of 12 more years, I turned that nest egg (and some fortunate timing) into my dream farm.  The same steps that will work for you too.

Rather than pull only from my own experiences, I also interviewed Skip Sligh on this subject.  Skip has bought tons of land in the Midwest over the years and he has helped literally dozens of his friends to buy their first farms and then take the key steps toward owning their dream farm.  We are sharing tips that took us each roughly 25 years to learn.

Being able to manage a small farm just the way you want to, creates a lot of satisfaction. It also creates a lot of value for your investment.

STARTING POINT

Your initial down-payment needs to be at least $15,000 to create a reasonable starting point.  That will buy you roughly a $75,000 property, assuming 20% down.  Your payments will be around $6,000 per year.  If the property has some income, that will really help to offset the mortgage cost and make this more doable on a budget – more about that later.

I am not going to be so bold as to say that anyone can do this, but more people can do this than actually think they can.  I am living proof of that.  You start small and work up. It takes a while, but the journey is part of the reward.  Plus, this is a ton of fun.

This is not going to buy you a large hunting property, but it can become the best investment you ever make if you do it properly and follow through.  You have to start somewhere.

The first farm you buy is the most important one. It has to be a good value because after you hunt it and fix it up, you will likely want to sell it and upgrade to a bigger farm.

LOCATION IS MOST IMPORTANT

You always hear the same advice when buying real estate; the three most important factors are location, location and location.  Where you look is important with your first hunting property too, but for a reason you might not have expected.

More than likely, your first property is not going to be your dream farm.  So, to get off to a good start toward that goal, your first property has to create maximum value.  It may not be the absolute best deer hunting, but it needs to be a great investment.

You need to find something you can re-sell for a reasonable profit and then roll all your equity into the next property. Think of it like a house.  Assume you some day want to live in a really nice house in a great neighborhood, but you are a long ways from being able to afford that.  So, you buy a house that needs work in an OK neighborhood at a discount.  You realize that by fixing it up you can sell it for quite a bit more.

You live there while you fix it up and then sell it for a profit and use the proceeds to buy a bigger house, in a slightly better neighborhood, but still one you plan to fix up and resell.  Eventually, maybe after another flip or two, you can roll all your equity into your dream home.

This is how it works with recreational land too.  Rather than trying to start in the very best deer hunting neighborhood where everyone shares the same management vision (these places exist but the cost is significantly higher), be willing to find something in a lower priced (possibly overlooked) area where you can find an undervalued property.

Understanding what creates value for hunting land is a huge part of making good buying choices early in the process of reaching your Dream Farm. Timber value is one factor to consider.

UNDERSTANDING VALUE

In order to know when something is undervalued you first have to understand basic value.   Assume that you want to buy land within an hour’s drive of your home in Minneapolis, MN, for example.  It makes a huge difference which direction you go.  Southeast is traditional bluff country whitetail habitat.  North is flatter, transitional habitat between ag and big forest while west and southwest gets you into predominantly agricultural land.

Each of these areas has a completely different style of land and a completely different market.  You can learn the fine points of various markets by looking at lots of properties and talking to as many realtors as you can.  The more research you do, the better your own judgement becomes.

With hunting land, value comes from having a decent deer population that has some potential to reach maturity.  The neighborhood plays a huge role here.   You want at least a decent neighborhood – some good deer in the area most years.  Second, value comes from having a nice mix of habitat and open areas where you can plant food.  Value also comes in the form of marketable timber and decent quality tillable land that you cash rent to a nearby farmer.

Improving the access within a farm is one way to increase its value. Making crossings on creeks that allow you to create new food plots and open up additional parts of the property for easy access and game retrieval is important.

FIXER-UPPERS

“Just like with the houses, you will most often find the best values in recreational land in those properties that need work,” said Skip Sligh.  “If you are willing to get your hands dirty, you can dramatically increase the value of a property.”

You can make a deer hunting farm better by improving food sources, planting fruit trees, making a small pond or two to improve water sources, fixing crossings and improving access to all parts of the property, doing timber stand improvement work (immediately) to improve habitat and creating great relations with your neighbors.

All of these steps will make the property worth more to the next person and will give you the opportunity to re-sell the property and move one step closer to your dream farm.

“Just like with the house,” said Skip, “it may take two or three moves before you have put together enough equity to start looking for your dream property.”

Timber stand improvement is a no-brainer method to increase the value of any piece of deer hunting property. It is best to bring in a forester to help you plan out this important project.

HOW TO USE THE 1031 TAX EXCHANGE

There is a section in the IRS tax code (section 1031) that allows for the replacement of one property with another of like kind within a set period of time, thereby postponing the need to pay capital gains taxes.  The 1031 exchange is super powerful and one of the keys to getting where you want to be as quickly as possible.

I have written about this process elsewhere on the site (click this link to read more), but in simple terms, here is how it works.  Assume you buy your first property and then after a year or two of hunting it and upgrading it, you sell it.

If you plan to do a like-kind tax exchange, you need to let the buyer know and ideally make it part of the purchase contract because the tax exchange sales process is slightly different from a normal transaction and so the buyer needs to cooperate.  The funds of the sale don’t go to you, they go to an intermediary until they are dispensed to purchase the replacement.

You have 45 days after closing the sale of the property you are relinquishing to identify up to 3 replacement properties.  Normally, you can set the timing of the closing to give you enough time to find a good replacement.  Then, you have 135 more days (180 total) to execute the purchase of the replacement.

Assuming you do all this correctly (realtors and attorneys specializing in land transactions can help you with the fine points), you won’t have to pay capital gains taxes on the property you are selling for a profit – at least not yet.  That helps you buy a larger second property, and a larger third and a larger fourth – you get the picture.

When you finally pull it all together and achieve the ultimate goal of growing and hunting mature deer on a piece of property you own, you will take great satisfaction in the journey and you will have a fine investment.

This doesn’t mean you never pay those taxes.  You do, but that date is pushed back until you finally take cash out.  In other words, if you sell property number four and put the money in the bank, you will have to pay capital gains going back to your original purchase.

So, cashing out is never a good short-term option and being disciplined enough to stick with a 1031 tax exchange strategy is the best possible way to get from where you are to your dream farm in the shortest amount of time.

FINDING THE FINAL PROPERTY

Maybe this process never ends, but for myself and several of my friends (Skip included) we eventually settled on a certain neighborhood and looked for property in that area that we could buy and hold long-term – AKA the Dream Farm.  By the time you get to this point, you won’t need any help from people like me or Skip.  You will be very savvy and will know exactly where you want to be by then.

So, to wrap this up, getting started is the hardest step and the most critical one.  Don’t wait any longer than you have to get started, but be very selective about that first property because it will make or break your strategy of parlaying each move into bigger and better farms.  If you aren’t sure the property you are about to buy is a good value, you aren’t ready to buy it yet.  Do more research until you know value when you see it.

This can be stressful at times, but is a lot of fun and anything with the word “Dream” in it is worth pursuing – stress or no stress.  Be smart, but get looking.  Good luck.

The post How to Buy Your Dream Farm appeared first on Midwest Whitetail.

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