Kinda OT: gettin started

This is a long topic but I will try to keep it short.

I am wanting to start a "hobby" farm. Well, hopefully it will grow into more than that. The banks have gone from "find a place under $240K and you got it; to "you make too much for this program, not enough for this loan" and so on.

The FSA office has been no help for me, I need atleast 3 years of schedule "F" (which I don't have because I have worked for my FIL, Dad, and others my whole life) to apply for any of their programs.

So my main question to you is, should I start buying equipment now and miss out on being able to deduct off of my taxes or should I just hord my money until I find another farm (missed out on several already) and scramble around to get my equipment in line? Or do you guys know of any programs or loans that would fit my situation?


Thanks for all of your advice, I know there is a lot of experience on this website and that is why I am coming to yous.


Brad

Give us a little more information. What kind of hobby farm? Livestock? Vegatables? Hay? Organic?

Sorry, It would be a hay and livestock farm in Southern Illinois.

Save your money, use FIL or dads equipment. The FSA office will never be of any use for any startups that stand a chance of success. USDA says we have to many farmers, they only help those that are successful.

Unless you can do some "custom" work to generate income I would not put too much into iron. When you are starting out it is real easy to blow your cash flow quick on iron. Land with out iron is much more usefull than iron with out ground. Don't know what kind of work you do on the folks place but if you can get your family to let you sell a few calves or a load of corn a year in your name, BAM you have a schedule F and in 3 years FSA will help you out. It's a pain with the paper work and they show up every year and look everything over but I bought my farm with an FSA beginning farmer loan and would not have been able to swing it any other way 2 years out of an ugly divorce.

Where bout's in So IL? I am about 4 beers from Shawneetown. Don't go there much, just a few Sundays a year when I don't plan ahead. Dang KY Blue Laws.

Dave

I'd agree with Scott. I got lucky and had a very good employer who helped me get started on my own.

I dunno how much help it would be,but if you talk to a bank or mortgage broker, ask them about a USDA rural housing loan. Don't know if they'd help out with any kind of farm/hobby farm, but we're going through them for our house. No down payment required (still putting $10,000 down).

It's not the lowest rate, but it's a 30 year fixed rate instead of a 5 year fixed ARM like most others want to do. In a couple years when the market picks up, it'll be a better rate when those 5 years are up and the Adjustable part of the ARM kicks in.

Donovan from Wisconsin

I believe you can buy the equipment and deduct it later when you put it into service. Not sure if there is a time limit. Could use the time to make repairs or upgrades. But unless it a tremendous bargin or once-in-a-life-time opportunity. I would suggest more saving and wait for an affordable farm to be come available.

Agree the fixed would probably be better for him, but I would be happy with a 5% five year ARM. Had a rather large 20 year real estate loan fixed at 4.75% for five years when the Fed rate was 1% and now five years later with a lower Fed rate they want 5.75% fixed for the next five years. Thought with the low Fed rate and the loan nearly paid, that the rate would at least as attractive. Surprise! In addition they charging an $80 accounting fee for loan continuance at the higher interest rate. Screw them, going to "rob" some from the 401K retirement and be done.

I am straigh East of St. Louis. So it is kinda South Central more than Southern Il.

We tried the Rural Housing Developement and we hit two road blocks.

1. Since my wife and I work several extra jobs other than our main ones we make $3K a year too much to apply for it in the county that the farms were in.

2. The land can only appraise for 25% of the purchase price.

I definitely agree that the 30 year fixed is the way to go. One bank tried talking us into their mortgage which was a 7 year fixed then ARM. He said that most mortgages only last 5 - 7 years. I told him that when we get our place we aren't moving ever so it would be a full term loan.

Personally, I took a different route. The first thing I bought were cows, then rented land for them for a cow calf operation. That gave me schedule F income, etc. Absolutely get assets that generate a revenue stream. Iron depreciates, land has rental value but not much else without livestock and equipment.

Once you get the revenue stream going, save, save, save for a down payment. I know everyone wants a fixed interest rate for forever terms. Starting out sometimes thats not possible. My first 10 years the only way I could get serious money was on a 1 year note. Every year the note came due and as long as I paid the interest the note renewed at the new interest rate. Over the course of the year I paid as much on principal as I could to cut the interest meter. I sucked, and I worried over it constantly but in the end I paid the farm off way quicker than I would have any other way.

First I bought cows, then more cows. Ended up working on shares for a guy cutting and rolling hay. He let me use his equipment for some of my own work in return for pay. So I started selling a little hay and had hay to feed the cows. Then, I found a place I wanted and it was cheaper to buy than rent for the cows so I bought, as described above. I bought junk equipment as cheap as I could since, at that point every penny I had was going to paying down principal on the land note. At the end of 10 years the farm was paid off. Then I started improving the cows and the equipment, but more effort on the cows as they were making me the most money. Last thing to happen was updating the equipment. Its been 22 years but everything is mine, paid for, with a positive bank balance and cash flow.

I started a small cow/calf operation this year, separate from my parents farm. I needed to purchase livestock and fencing materials, but I have most of the equipment already. Sit down with your accountant to review the Schedule F requirements first, so you know what the requirements are.

Don't refer to it as a "hobby" if you plan on filing a schedule F for deductions. You need to have a business plan to show that you are farming with the intent of making a profit. Your supposed to show a profit 2 out of 5 years, but even if you never do, you can pass an audit if you can show your trying to make money. If the operation can be proven to be a hobby, where the IRS can show that you can withstand losses without taking action to improve the profit, you would have a problem in tax court.

I would suggest buying the equipment when you have the opportunity to get it at the right price. When you start the farming business, you can then add it to your depreciation schedule. I think the depreciation on equipment is 7 years, as is fencing costs that are capitalized. From what my accountant told me, they want you to list the actual price you paid for each piece of equipment, not the current value. I'm bringing in three tractors and a bobcat that I've owned for many years into the business, and I've purchased some used equipment this year from my parents. I have several other tractors too, but I don't have them on the depreciation schedule as they aren't practical for modern farming and would raise suspision of a hobby farm.

I planted a new field of alfalfa with oats cover this spring, so I was able to sell 200 bu. of oats and 100 bales of straw to show some income. I'm also planning on selling 3 halves of beef from our steers. I'll be able to show a few sources of income on the schedule F, but it will probably be less than what my expenses have been this year due to startup costs.

Cost of breeding stock is capitalized over 5 years, while feeder cattle are expensed in the year that they are sold, live or as meat.

I bought a bull and 5 heifers that will be capitalized over 5 years, and I bought two steers to butcher this winter that will show expense for this year. To purchase the livestock, I took out an unsecured line of credit at the bank with a max of $10k to get an interest rate around 7%. This is about 1/2 the rate of what a loan would be, and it's more flexible, so I can pay back the principal as I want, basically like a credit card, but better interest rate. We're already in a fixed 30 yr. mortgage, so land wasn't an issue now.

Another option is to buy the ground, and pay someone else to do custom work on your ground. Everything stays in your name, you just pay someone else for the equipment. Had several neighbors do that when they were on the downside of their careers, rather than buying replacement equipment, they still "farmed" but it wasn't their equipment doing the work.

Hey Brad,
My missus and I are in the process of trying to buy land and get started also. Found a great piece last year, made offer, were a few days from closing, and deal fell through. We were devasted. Fast forward 1 year... found even better piece of ground for less money... we're completely out of debt (for now) and have a substantial amount of cash to put down... looks like everything is going to work this time! As I was looking around for financing (for a small portion of this land) I stumbled upon "Farm Credit Service"... a government chartered (but no connections with the gov't) financial organization sort of like a "credit union" for farmers. They will finance just about anything related to your farm with great terms! They are a regional organization... should be able to find on google. My advice, don't rush, you'll find the right deal when the time is right; save your money for a down payment... large amounts of cash talk... VERY LOUDLY! ...get out of debt. When your finances are in order, finding the cash to finance your dreams is no longer a problem! HTH ...D