Investing in Rural Real Estate – No Experience Required
Tips and Advice from Bill and Kim Boyce with Fay Ranches
Owning a ranch—the idea sounds inviting, garnering visions of a mountainside retreat in Colorado, fishing blue ribbon waters in Wyoming, waking up to oceanfront views in Oregon or running a cattle-breeding operation in Montana.
Yes, cattle breeding.
Beyond simple beauty, owning a large or small-acreage property can offer excellent income potential that turns a recreational retreat into a productive business investment. Many homebuyers shy from purchasing a property with agricultural or livestock potential due to lack of experience, but with the right information and knowing the options available, owning a previously established or developing a new cattle-breeding ranch, productive salmon fishery, hay/corn farm or even a winery is well within reach.
“Your goals drive the entire equation: from what ranch to purchase right through to how it will be operated,” said Bill & Kim Boyce, licensed sales agents with Fay Ranches. Based in Lewistown, Montana, they have an extensive history in owning, buying, selling and managing rural real estate. “Everyone has a different motivation for buying property, whether it is recreation or investment oriented or most often a combination of several different factors. This all has to be taken into consideration when making the initial decisions about how to move forward.”
Options of Ownership: Ranch Manager or Lease Agreement?
Owning a production-oriented property comes with a question: does the owner want to be responsible for the daily operations or do they want to place those responsibilities in the hands of a leaseholder? For those with no or very limited experience in property management or for a new property without a significant income-producing history, choosing to work with a leaseholder is perhaps the best choice. “Entering a lease situation will allow the owner to place the responsibility of ranch operations in the hands of a leaseholder and still generate income,” explained Boyce. “There are several different lease structures that may be considered with varying levels of involvement on the landowner’s part, such as crop share, net share or a fixed cash rent.
“In a crop share lease, the landowner receives a certain share (%) of the crop and usually will also share some of the expenses with the leaseholder. In a net share situation, the landowner receives a smaller share of the revenue but the lessee pays for all of the expenses. The route of least involvement would be a fixed cash rent lease where the landowner receives a set amount of rent no matter what the income generated from the livestock/crop.”
If, however, the existing farm/ranch operation has proven to be productive and an experienced ranch manager is in place, a landowner with even minimal experience can venture to become more included in the day-to-day financial and operational decisions. “This would mean working closely with a ranch manager who would be interested in staying on board; this can get tricky depending on who/what processes have been in place and whether or not they meet the criteria of the new owner, especially if the plan is to take the ranch in a different direction. Change can be a difficult thing for someone who has lived on the ranch and has a set idea of how things should be done, but there are obvious advantages to having someone on the team who is familiar with the ranch, community, weather and pretty much every other aspect of the business,” said Boyce.
Above all, Boyce stresses that the animals, crops, workers and daily operations of a ranch/farm do not “stop and wait for the ink to dry.” A well-planned transition, especially for a previously established business that is changing hands, is essential to keeping a ranch/farm operation running smoothly.
Best Choices for an Absentee/Inexperienced Owner
For an owner who plans on having little to no on-hand experience with the property, the size and scope of the development is less important than finding a competent and trustworthy lessee. On the other hand, for an owner who desires to be more involved, each situation is unique.
“It’s about understanding your operation and deciding how many ‘moving parts’ you want to handle,” explained Boyce. “For example, an intense farming operation that includes major irrigation and a cow/calf operation is a going to be year-round responsibility with daily decision making. There isn’t a lot of down time in an operation like this—just as soon as you are done calving, branding and turning out, someone needs to get into the field and start farming/haying, etc.—all of which are subject to change at a moment’s notice due to Mother Nature, markets and more. You can simplify things a lot by focusing on either farming or ranching or by downsizing the scope. Less diversity equals easier management.”
Tips for Selecting an Owner Representative
Ideally, the perfect candidate for a lessee is someone who knows the area and has been active in your particular ranching community and perhaps even worked on the property for a number of years, but that ideal scenario is not always plausible. Once again, the position is defined not by who is most readily available, but more by your particular goals for development. In short, the owner representative should be knowledgeable in their field, provide a history of reliability and commitment and be willing to work with you toward your goals.
“One of the most important aspects is to create a job description that most accurately reflects your goals. For example, do you want someone with a traditional set of farming/ranching tools who can work on equipment or possibly be an AI tech, or are you looking for someone who has more experience with wildlife/habitat management and can work with bird dogs and put in food plots?” noted Boyce. “Many times, no one is perfect, but at the end of the day there has to be something that this person is bringing to the table that really excites you. You want somebody that has their own thought process and can think on their feet, but who still understands your goals for your ranch—it’s important they’re open to your ideas and opinions. Attitude is everything; you can learn the rest.”
Management and Communication
There are many reasons to purchase land in today’s market: investment potential, weekend recreation, interest in the farm/ranching lifestyle and many others. There are also many reasons why an owner cannot always be present on the property: business/recreational travel or perhaps you reside in another city/state. Either way, is it possible to effectively manage a property without an extended presence? The answer: With the right tools and personnel in place and effective communication, the owner does not have to be a full-time presence in order to create a successful operation.
“The frequency of an owner’s visit is really up to the owner,” explained Boyce. “In fact, more than anything else, it’s communication that’s the key to any ranch, whether the owner is on site or not. It’s a good idea to have regular conference calls between owners and managers to discuss day-to-day aspects of the ranch operations; that way, when visits occur, they go smoothly and are less stressful for everyone involved. Obviously, different owners will desire different things, but this circles back to hiring the right people and making sure everyone understands your priorities. Personally, as managers, we try and give the owners as much room to breathe when they visit as possible, especially on short visits, by scheduling meetings to discuss ranch operations or to see different projects. It keeps everyone from feeling obligated to spend the entire time together working.”
Key Mistakes to Avoid
As with any investment, sometimes the “romance” overshadows the “reality.” Making a rural real estate purchase, especially one that extends beyond simple recreation into ranching/agriculture development, can seem ideal when prices are low and everyone else seems to be investing, but having a reliable plan is essential to success. From overestimating the amount of acreage to failing to understand the demands and markets of your particular area, here are a few pitfalls the new investor can encounter if not prepared.
“We’ve seen many owners get excited about the romance of their big ranch out West, but it’s important for people to not get ahead of themselves. It’s important to avoid buying more ranch than you have capital to operate or jumping into operations/improvements before you really have a clear path of your goals. The ‘capital/cash burn’ on some of these ranches can really take a lot of the fun out of the process for new owners if they are not prepared for it. Buyers need to be extremely clear on what their financial commitments will be beyond that initial purchase.
“At times you’ll see ranches for sale because they lacked sustainability under the existing management plan. It’s important to know not only what the current market will sustain but also the fluctuations of the financial environment,” said Boyce. “This is another benefit of a cash lease. Usually, the owners will be responsible for fixed costs like property taxes and capital improvements, but they don’t get caught trying to feed the metabolism of a hungry ranching operation.”
For more information on investing in rural real estate, please contact Fay Ranches at 800 238-8616 or visit www.fayranches.com.
Read the Rural Real Estate PDF in the Fay Ranches Press Section