A subscriber asks – Renting vs. owning; Buying farmland

Hi Chris….
Two questions:

1) In your latest pod cast about Real Estate – you mentioned govt workers in northern Virginia making $100K and renting single family homes. WHO IN THEIR RIGHT MIND MAKES $100K AND STILL RENTS? Why aren’t these people BUYING their own homes?

My girlfriend lives in northern Michigan and for a $15K down payment you can get a 30-year mortgage. There are plenty of homeowners in Northern Michigan that have only part time dead-end cashier jobs that make the mortgage payments and OWN their own homes. Of course, you can still buy a home for$130K in Northern Michigan.

2) I am taking seriously the talk of the food supply reductions and food rationing coming to North America starting in 2024. Buying agricultural land to lease out to farmers is not for me and the regulations around farm leasing is best left to the professionals.

So, I have been considering LAND (a farm land REIT paying 3.9%) and their preferred shares, LANDP, paying 6.1%. I hate REITS but I think this may be the only way to play agriculture and the coming food reductions. Farm land values are supposed to skyrocket.

WHAT DO YOU THINK?

Thanks,
Gary.

Here was my response:

Why would anyone making 100k rent?

Hi Gary,
Thanks for the email. Let me answer your questions.

1) Many people cannot properly manage money, and 100k is not all that much around here (DC area) anymore. Plus, many people do not want the responsibility of owning. I charge below-market rent, as my ongoing costs are traditionally less than other landlords. These tenants see the value, stick around, and cost me much less in repairs and such.

This is one important item to understand as an individual landlord; The tenants are only as good as the landlord. When I hear landlords complain about their tenants, I tell them to look in the mirror. My tenants are very important to me and I let them know, especially in actions.

In the DC area, it is virtually impossible for the average home buyer to purchase a SF house (non-condo) in the DC area with a 20% down payment of less than 75k. In NoVA that number is now well over 100k. In Suburban MD that number drops to as low as 80k. The average SF house price in Fairfax County is at least 600k. In the better parts of PG it is as much as 450k. But the economy is very good here, so the multiples of income required to buy is actually better than in most other prosperous cities. Just ask those living in San Francisco, Los Angeles, Toronto, Boston, or NYC what they think.

The average (not median) household income here is about 125k, and that takes into account the many renters looking for better work. For those who are college degree-holding SF homeowners, that household income number approaches 175k. It’s all relative.

Buying farmland
Farm land that you can purchase. Why let the REITs buy it for you?

2) I agree that there are going to be serious food problems in the future, but I don’t think the path will turn out as many in the alt-media believe. I think this year’s manufactured coronavirus crisis provided a perfect dry run for what to expect; the results of any crisis will be manufactured and manifested through the supply chain, so the farmers and ranchers will get the shaft, too.

If this is the case, it will be difficult to make money speculating in commodities. I do notice that the commodity complex is rising here, so there are some nascent warning flags within many individual commodity items. But I think that the forces in any economic collapse will be deflationary in nature, and this will affect the commodity complex in a manner similar to what transpired earlier this year.

Monthly chart; LAND’s price performance since inception.

I often get asked about the Gladstone Land Corporation REIT (Ticker: LAND), since it is marketed well. Here is the bottom line about speculating in land when you turn over your money to someone else to manage. They will always pay more for the land than you would if you researched and waited to spot a good opportunity close by in your area. The time to buy LAND would have been at its nadir during the manufactured coronavirus pandemic in March. LANDs price performance during that stretch should be a warning to its owners that during any protracted economic downturn, its asset value will suffer, and that its relatively higher yield would be in jeopardy. My concern is that LANDs price has run up too much here in response to FED policy.

Here is a summary of LANDs latest asset purchase.

https://seekingalpha.com/news/3581080-gladstone-land-adds-farmland-to-portfolio

Gladstone Land adds farmland to its portfolio
Jun. 8, 2020 8:50 AM ET|About: Gladstone Land Corporation (LAND)|

Gladstone Land (NASDAQ:LAND) acquires 590 gross acres of farmland consisting of 554 planted acres of mature pecan trees in Kern County, California, for ~$14.2M.

In connection with the acquisition, Gladstone Land also entered into a 15-year, triple-net leaseback agreement with the seller.

“The acquisition of this pecan orchard adds a new permanent crop type to our portfolio and should result in another good, long-term investment for us,” said David Gladstone, President and CEO of Gladstone Land.

If I were living in a rural area, I would take my money and purchase farm or ranch land and lease it out. In this case, LAND’s management leased it back to the seller. Over time you will make much more money than if you handed it over to someone, from which they make the most profit. Go to Gladstone’s website; you are paying for that large overhead. They hand back a small fraction of what you could make over time. I am always a fan of direct ownership. The benefits that accrue to the direct owner are what make it the better choice.

If I were looking to park money, I would rather buy XOM and get an 8% yield (though that yield may fall over time if oil prices stay suppressed). The dividend yields of PFE and WBA are over 4%, and T’s is about 7%,  so I would rather own these stocks for yield and buy land directly.

Regards,

Chris

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