As a small farm or hobby farm, you may be interested in renting your farmland to others. It can be a great way to generate revenue. However, becoming a landlord naturally comes with some responsibilities. The first is to create a rental agreement.
This article includes four essential considerations for creating a rental agreement.
1. Determine Your Price
There are three key factors that will influence the price you choose to rent your land at. This includes production value, asset value, and personal objectives.
Production value is how much your land is worth plus its rate of return. A simple way to think about production value is the revenue your land would generate if you were to farm it.
Calculate production value by multiplying what your land is valued at by the estimated rate of return. Then divide by the number of acres to get a price per acre.
Asset value is your production value and demand for your land. You may also consider the following factors in asset value:
- Expected appreciation of land over time
- Alternative revenue options for the land (ex. infrastructure rental property)
- Convenience based on location
- Sentimental value
The last factor to consider in setting a price is the personal objectives persuading how you choose a renter. It may be tempting to focus on maximizing your revenue, but reflecting on why you want to rent your land can affect if you choose the highest bidder or not. Some important factors aside from price include length of time a renter will commit, whether you would like input into the farm operations, and a desire to support the next generation of farming.
2. Communicate Your Expectations
Set up for success by being upfront about the details that matter to you. Being clear and honest regarding expectations will reduce the likelihood of disagreements with your renter in the future.
First, it is crucial to set expectations on taking care of the land. Just like someone who rents a house should be responsible for the space and avoid causing damage, a land renter should be a good steward of your property. You can be proactive by adding into the agreement how a renter should adequately manage the land.
Other factors that may be relevant to include are whether you would like to know what crops are being produced, frequency of crop updates, weed control logistics, and plans for crop rotation.
3. Choose the Contract Type
The next step in creating a rental agreement is to arrange the means of payment. A common choice is a cash contract at a predetermined price. However, if you plan to be more involved in operations, you may choose to split revenue and expenses with your renter.
4. Write it Down
The final, and arguably most important step, is to write down your agreement. Regardless of how trustworthy your renter is, it is crucial to have a written contract. Verbal agreements allow for uncertainty with key details, such as payment dates and rates, that could be easily clarified with a written contract. Reduce the risk you take on as a landlord by creating a physical copy of your agreement.