Land Of Dreams
10:56 12 April 2010
Accountant and smallholder TOM MAIN gives advice on finding a property and prudent financial planning
The most difficult part of starting a smallholding is finding a suitable property, which has enough land to support the various crops and livestock you aspire to keep, that is affordable. Many properties, particularly those with a detached house and surrounded by their own land, will be far outside the reach of many potential smallholders.
Generally speaking, the South East of England is particularly expensive, so looking to areas where property is more reasonably priced may be one answer. However, this may involve moving long distances to more remote locations, with a limited customer base for a smallholding enterprise.
Renting a smallholding is another option. Although not as easy to find as the average residential-only rental property, there are some out there. Finding them is another rather tricky problem, particularly where you are looking much further afield than your immediate locality. Other than local and specialist rural estate agents (such as Rural Scene), which may have a property which suits your criteria, other avenues worth exploring are adverts in local papers and farming publications, such as Farmers Weekly.
Large landowners, such as county council estate departments and The National Trust, sometimes have small farms or smallholdings for rent. These will normally be up for rent by competitive tender. If this is the case, you will be required to submit detailed business plans, together with a list of assets already owned. You will then have to give an annual rental figure which your business plan can support. The successful tender will not necessarily be the highest rental offered, but will be one that can put across a coherent and workable plan. The last thing the landlord wishes is to be going through the tender process again in 12 months time because the new tenant has been too optimistic in tendering an unaffordable rent.
Properties with agricultural ties are those which have as a condition of occupancy that the occupier is involved in earning their living from agriculture to a greater or lesser extent. As the market for such properties is restricted, this inevitably brings down the price - often by as much as 30 per centcompared to the open market value of a property. Clearly this offers a much needed boost to the smallholders’ chances of securing the property.
A further alternative may be to try and find some land close to your current dwelling, that is for sale or rent, which could be used as a smallholding. This may be a cheaper option and, if you have suitable contacts in the locality, may prove a lot less hassle than moving house to a new area. However, the management of the holding, particularly if you intend to keep livestock, will prove more difficult if you are not living on site. There will be periods, for example lambing time if you intend to keep sheep, when frequent checking will be essential to prevent losses, and this is easier if you are living on site. Theft and vandalism is an unfortunate feature of modern society, so do consider if this is likely to be an issue too.
To borrow or not?
In an ideal world, you would be well advised to not borrow. Generally speaking, however, in the imperfect world that many smallholders find themselves living in, there will be no option but to borrow money, particularly if a house purchase is involved. You may, of course, be in the fortunate circumstance of not having to borrow, in which case you are in a great position to find your dream smallholding.
Assuming, however, that you have to borrow at least some of the money to acquire your smallholding, realistic budgeting will be essential to ensure that you approach the lenders only once – no lender is comfortable if you have to go back to them cap-in-hand to get extra finance halfway through a project.
There are several sources of finance which may be available to you, but, broadly speaking, either you persuade a friend or relative to lend you the money or you will have to approach a commercial lender. Virtually all lenders will want three things from you: firstly, a deposit, which, in order to secure the best rates of interest, needs to be at least 25 per cent of the amount you are looking to borrow; secondly, a secure income stream - the days of self-certification mortgages are over and lenders are now under pressure to revert to sensible lending practices, which means no more than three to four times income; thirdly, security will be required to fall back on should you default on the loan.
Normally this will take the form of a charge over the property. If you are hoping to rely on self-employment income to prove affordability for a loan then the mortgage company will want to see three years’ of accounts. Clearly this presents difficulties if you are starting up a business and is a further difficulty in getting finance to get started. The easiest option is probably to ensure that any borrowing is based upon employment income, meaning that, if there are two people involved in the smallholding, at least one of them keeps their day job
Budgeting and cash flows
Many start-up businesses get into difficulties because of cash flow problems. This should not be confused with profit - although profitability is important, if the cash is not arriving in time to pay the bills, then the business will quickly fold. An accurate cash flow forecast is therefore vital, particularly in the case of smallholding, when it may be several months before the enterprise starts producing positive cash flows. All crops and livestock have a lead time, which varies from a matter of weeks for eggs from point of lay poultry, to a year or so for your own home-bred lamb.
Set up costs need to be factored into any cash flow and can be significant. Smallholding can be a capital intensive business and most people tend to underestimate how much it costs to set up an enterprise. The best advice is to start off small and not risk all your funds in a new enterprise. Equipment can then be acquired gradually and even borrowed from friends and neighbours. This will help you learn by experience, not just how to run the enterprise most efficiently, but any mistakes you make will be proportionate.
It will also quickly become clear from experience exactly what equipment is required so that money is not wasted buying unnecessary and expensive equipment up front.
Remember to be realistic. It is very easy to be optimistic. A few ‘what ifs’ should be incorporated, such as what happens if yourlambing percentage is only 125 per cent rather than 175 per cent? In addition, remember that every product must have a customer if it is to bring in cash. Even if you produce the expected quantity of produce in the end, it is finding the customer to buy the product that counts. If possible, produce to order – find the customer first, then produce it. If you are producing food products, a large freezer will quickly become your best friend,as any gluts of a particular crop can be easily stored.
Some costs, such as depreciation, are not cash costs and should not be incorporated into a cash flow forecast. While machines do wear out and buildings may last a long time if constructed properly, this will not affect your cash flow.
If possible, avoid having expensive machinery sat idle for long periods of time. Sharing machinery and equipment with friends and neighbours can be a great way of reducing machinery costs and also ensuring that you pool skills and labour. Smallholding, by its very nature, can be a labour intensive enterprise and any extra help can be very useful. Many people that don’t live on a smallholding may jump at the chance of assisting for half a day just for the experience. Two people can not only get jobs done quickly, but the camaraderie from neighbours can make any job more interesting. Ensuring, however, that the terms of the sharing agreement is fully understood on both sides, is the key to making cooperation work.
Getting started in smallholding, particularly finding the land to run the smallholding from, can be very difficult for the cash-strapped buyer. The location will affect how expensive a piece of land is, particularly where the land is flexible enough to be put to other uses, such as horses. Renting a smallholding may be another option to those who do not wish to borrow vast sums of money to get started.
Should borrowing money be the only option, careful budgeting will be required. Realism and a good business plan is essential if the bank manager is to look favourably on lending you sufficient capital. Professional help from an accountant with a good knowledge of smallholding may be very helpful to those starting out in such a venture.
FINDING YOUR SMALLHOLDING
- www.ruralscene.co.uk Estate agent specialising in rural property
- www.nationaltrust.org.uk Large landowner which often has farms/smallholdings to rent
- Many county councils will have farms/ smallholdings to rent – search online
- The classified section at the back of this magazine
- John Nix Farm Management Pocketbook 2010 - a comprehensive guide to farm
Meeting your bank manager
It is best to get an agreement in principle for your loan or mortgage before you put an offer in for a property. A business plan is, therefore, essential to ensure that your application for funds is taken seriously. You will need to show how you intend to manage your day-to-day cash flow and how you intend to purchase any larger items of equipment; these include any housing as well as any machinery and the livestock themselves.
Experience cautions that everything will take longer than intended and cost more than you first thought.
It is also essential to remember that you cannot live off fresh air – you must budget for living expenses.
Although you may hope to live mainly off the land, this takes some time to materialise.