Question: What are the financial considerations if I want to buy a farm?
First and foremost you should have money or assets. It would help if you had collateral, such as a house, livestock and vehicles. A good monthly income, or a good yearly income in the case of a full-time farmer, would be a great benefit.
- For instance, if you want to buy a R1 million farm, it means if you have no collateral, you will have to pay R1 million in cash to be able to purchase the farm.
- If you earned a salary of R10 000 a month, you might get a loan of approximately R200 000. This means you must be able to pay R800 000 upfront.
- If you could manage this, you would have to pay between R2 000 and R3 000 of your salary each month on the outstanding loan amount.
- You should not spend more than a quarter of your salary to repay a loan, otherwise you won’t be able to cover your other commitments.
- If you cannot raise enough money for a farm in this way, you will have to apply for a loan through a commercial bank or your co-operative.
- Under normal circumstances, such a loan would only entail the amount still needed, if you can prove a sufficient monthly income, or show positively that your farm can generate enough to repay the loan.
Be careful not to take out a loan that you won’t be able to repay on a monthly or annual basis. A farm usually does not generate the desired income immediately after it has been bought.
It is vital to remember that the person buying a farm will be the person responsible for generating an income from it. This only happens through proper planning and hard work.
WHAT IS BEST WHEN BUYING A FARM, AS AN INDIVIDUAL OR A GROUP?
- The best way to buy a farm is by a cash transaction.
- This isn’t always possible as very few people have such resources.
- It is always better to buy a farm as an individual, then you alone will be able to decide what happens on it.
- Buying a farm as a group means that everybody who has a share in the farm will have as much say in what happens on the farm as their shares entitle them to.
- The group will have to decide what needs to be done and it will not always be easy for people to agree on just that.
- People who do not pull their weight could also create friction between the stakeholders.
If a group could manage a farm like a business, there would be a good chance of success. Problems usually start when people who bought a farm as a group don’t have any knowledge about, or experience in, farming and this could lead to a dismal success rate.
Any potential buyer should first enquire about the farm and visit it. You will then see for yourself that farms which were bought by large groups of people have usually gone under – leaving little infrastructure behind.
Moreover, farms bought by individuals and/or their families, consisting of no more than 10 people, are usually productive units that provide well for their owners.
- This article was written by Cois Harman and first appeared in Farming SA.