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buying farm land as an investment

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picassomcp

Member
I have the opportunity to purchase an 80 acre parcel real close to me. It has been farmed by a BTO for at least 10 years and probably longer. This is a decent 80, 75 acres of it are tillable, this BTO has been paying very high (too high I think) rent on this piece. I talked with the land owner about buying the property as I heard it was for sale. Landowner confirmed that the piece was for sale, he said he wants $3,000 per acre. I thought his price was a bit high for our area, but not by much. Landowner said the BTO made him an offer of $2700, but he just would not sell for that price. Just for the heck of it, I decided to run some numbers on ownership. It turns out that it brings in almost enough to cover the cost of a mortgage on the property! Annual principal and interest payments on a 30 year schedule + annual property taxes equals only $4,000 per year more than the annual rent income! I would have to put $25,000 down to reach those numbers, which I could do, however, I could pay down other debt with that money which is what my original plans are/were. Running these numbers kind of makes me want to buy the land, but I'm just a bit hesitant.

I have wound down my farming practices, its just not profitable enough to continue being that I am such a small farmer. It also takes me away from my other business that does pay the bills. I still love agriculture and would like to have some connection with it while the kids are still in the house. I just turned 40, so hopefully have many years ahead of me yet. Also, I believe that this could be a great investment that could payoff great in years ahead.

While excited, I do have some concerns. First is, the land rent currently being paid is on the high side of what area land rents for. With grain prices the way they are, could land rents drop? It seems that never happens, but it sure would change my numbers if it did. Also, I just need to sit down and see if that is really the best use of the down payment funds that I would be using. Those funds were supposed to be used to pay down another investment property (house) but if it makes sense, I could use it for a down payment on the land.

Just looking for others thoughts here, it seemed crazy to me that I could buy bare land that nearly pays for itself each year right from the get go. It really gets my attention, but I continue to think on it. I feel I need to either go for it, or let it go real soon. I am thinking that this is one of those opportunities I will regret later in life if I don't go for it now, however, will buying the land drag me down too much in the next few years and in turn cost me more than its worth? Looking for others thoughts on this.
 
I wish when I had move to where I am I had brought lake front land but did not. Back then it went for $100 per foot of lake front. Now it goes for well over $1000 per foot and in many places $2000. Just empty land no houses etc. But that was also 38 years ago
 
I have a rough idea of where the OP is in MN, and the productivity of the land and length of growing season is nowhere near what you are used to in Iowa, so yes, location really does matter. Land where I"m at typically goes for around $5000/ac. His ability to almost cash flow is brought about by a substantial down payment. Personally, I think it may be an opportunity for him.
 
I would say buy but only if you can make it cash flow with the rents being 70-80% of current. Rents can and are going down. The price of grain has dropped why would you think the cash rents would not have to eventually reflect that drop??? Land is a good long term investment IF your not buying at life time highs. $3000 sounds low when compared to our Iowa land values but if the 10 year average in your area is only $2000 then it is high. So I recommend crunching some more numbers.
 
I wouldn?t be asking advice about this, I would have already bought this land at that price . My experience is land price go up in the long term, and are a good investment as no one is making any new land , and no one has come up with an alternative to land.
 
I have to agree with everyone else. There seems to be a target painted on farmland, and with urban populations continuing to spill over into formerly rural land, "farm land" is getting more and more expensive. Developers like it because it's already cleared off and normally drains well, so that's a perk for them.
 
JDSELLER has some pretty good advice. Here are some thoughts.
1) You admit the BTO is paying to high a rent--wouldn't it be reasonable to expect him to want to pay less? Grain prices are down and going lower, why wouldn't rents go down and in fact that has been reported.
2) If you use money you had planned to pay on a house (where you are living??) Will you still be able to make the house payments AND the land payments even at a higher amount?
3) How secure is the other business?
4) Is your kid's future secured? Have you got college planned for?
 
Seems odd to me the BTO will pay a lot for rent but won't pay the 3K$ an acre to buy if things are like you think they are.Seems to me the BTO knows something you don't.
 
How do the numbers work out at what you would consider normal rent, and at 75 percent of that normal rent?

Liquidity, is your income stable and are your other assets liquid enough to cover all your payments? The 1980 Russian grain embargo triggered the last farm crisis when farmland prices dropped by over 50 percent. It took over 20 years and the ethanol subsidy before farmland recovered to 1980 prices. Until the ethanol subsidy came along grain prices, farmland rent, and farmland prices were flat, but livestock was profitable.
 
Not sure what land in your area goes for but $3000 would hardly buy a piece of scrub hill farm around here. The last farm in my area that was crop land brought $7800 an acre.
 
How close to you ? If really close especially right next to you ? could you take a chance on missing it and some bad neighbors buying it ?
 
The moment the land changes hands, the BTO is going to be on your doorstep to negotiate a new rental agreement with you. Most likely he will try to get the rent reduced, and cop a "take it or leave it" attitude if you try to play hardball. This can leave you with NO income from the land whatsoever, if he is the only BTO working land in the area.
 
Location, location, location. Here in N. Tx. farmland has been a super investment due to the location and the fact that if you keep it in Ag. Production, your taxes are really low....so you don't eat up your appreciation with taxes. Hard to guess the future. I don't spend any time in the community planning business or thoughts but who would have thought that farm land that I considered purchasing when I thought about becoming a "ruralite" vs an "urbanite" that was worth $300 per acre in the mid 70's would be selling for $10, and in some places $20k/ac today with no end in sight.
 
(quoted from post at 02:35:59 01/14/19) I would say buy but only if you can make it cash flow with the rents being 70-80% of current.
Click to expand...

Best answer.

Paying down the "other debt" you mentioned will give you a return on capital equal to the interest rate you are now paying.
 
What state do you find land for $3,000 an acre in? My area you would not touch the poorest ground for that and I mean ground that would not even be suitable for pasture let alone crop land.
 
If you do not buy it someone else will, you will not have an opportunity to purchase it again, or if you do, if will be at a higher price. The BTO needs more and more acres to operate to cover his fixed overhead. He may play hard ball but he has rented it for 10 years and most likely wont give it up. If he does well, there are others who will be interested in it also. I say go for it!
 
I can see the upside in buying the land, but I certainly won't stick my neck out just too far to do it.

I'd like to ask you this. Things go in cycles, ups and downs are normal, the Ag economy is no different. Where do you feel the ag economy is at right now? I believe it is on a downward trend right now with grain prices the way they are, but is land lagging behind a bit on the cycle? I'm wondering if land is at a high right now and might trend lower over the next few years until the Ag economy starts to cycle back up?

If this is the case, I may be upside down on this land for the first few years after buying it?
 
Others have given great advise. I would asses it by taking the farming BTO out of it. Now what can it be?? Housing development, gravel pit, commercial property? What are the trends in your are? Population decreasing and land values going down? Real estate like any thing can be a bad investment if done incorrectly. Also plan on holding it for a while. Just think it through and have a backup plan.
 
Buy it. It's worth more to you than anyone else because it's close to your property.Like DZC3 said you can always rent to someone to farm.Land will never go down since there not any being made. I've always made money on property. Got land that I bought for $585 20yrs ago and now worth $3000 plus what income it's made.
 
Just my opinion but so much of the land pricing and purchasing has been driven by emotion versus logic that one has to be wary when the attitude shifts on that. When the players left are only concerned with a reasonable return versus "got to have it and I don't want the other guy to have it" be prepared for the day when that happens so the emotional and economic impact does not blindside you. Around here for the most part I don't see the guys who have "run the numbers and this is what I think it is worth based on production" buying much of any ground. One of those guys is extremely well heeled financially. The only guys I see buying ground are guys like you that have a very strong non-farm business as a revenue generator. Then there are the Amish and Mennonites who put a half dozen kids to work for several years before they turn 18 to help dad buy things. Sometimes you see a small parcel of land such as 50 acres and that is when you see somebody cash everything in including the kitchen sink to beat the other guy out. I heard of one example when the big FSA payments were coming out that a farmer scraped everything together that he could including an extraordinary FSA payment to make a bid on 50 acres which he did get. It will take probably 70 years to get a return on it if commodities don't flatline but by golly "the other guy did not get that dirty rat....."
 
You can in parts of western MO and eastern KS...$3000-4000 per acre will buy land that grows 30-40 bu beans and 120-150 bu corn..In a fantastic year bean yields can be 50-60 and corn 180-200 but not that many years ago the corn made 0....I was in a dry pocket in 2018 and the corn made 80 and the beans 25..
 
In lots of areas land did go down in the 1980's...In my area land that was purchased in the late 1970's for $800-1000 per acre sold on the court house steps in the mid-late 1980's for $300-500 per acre...7 years of bad weather (1980-86) and 20% interest ruined a lots of farmers in my area..We went from a horrible drought in 1980 to a 500 year flood in 1986.....There were tons of close out sales...Our AC dealer had 50 repoed combines on the lot and it ruined him..
 
That is not really true anymore. I like to cover my ears as much as the next "got to farm it" guy when it comes to unpleasant news but synthetic milk and meat is getting worked on in the labs and 8 dollar corn got other parts interested in growing field crops that were not previously interested in doing that. Don't assume that the US and Canada has the world in their grasp going decades into the future.
 
I don't know how good an investment is if you have to pay interest on it. It's like I tell people who want to buy land around here and rent it to me for enough to cover their costs,"If I wanted to make the payments,I'd buy it myself.".
 
Do the Math at worst case scenario. 30 year mortgage is along time even if you are 30 my wife and I own quit a bit of property. Including some commercial buildings. 15 years is many times very close in payments and almost always a better interest rate. Sometimes you can pay additional points on a loan and get a better interest rate. Ask your self how will this effect my end game when I want to retire. At 40 like the song says you blink and your kids are grown and gone good luck and good fortune.
 
That is the problem in that land is most likely at a 100 year high when factoring normal inflation in. The spiral higher can only occur if the young people coming in have it handed to them so they can throw all the revenue from the debt free ground at the land that is available for purchase. That is the mentality of the drivers in farmland pricing.
 
Yes. Lots of land around here will never approach the prices seen in a lot of the corn belt as soil quality and growing season do not match up favorably. A fair amount of soils here are just as apt to produce 100 bushels of corn per acre per year as they are of producing 200 bushels per acre. It takes a "perfect" season to get 200 bushels of corn per acre on a lot of my ground.
 
,"If I wanted to make the payments,I'd buy it myself." RR lot of truth in that!!
got me laughing as dad used to say on repair or services "I don't want to buy the place" Another one is I can stay home and make nothing.
 
To those that say land never goes down, they must not have lived through the 80s. Land can and does go down. Now over the long term it goes up reliably, but it can and frequently does go down in the short term. So make sure you can carry through the low times and intend to do so.
 
Also an old fellow used to tell me They don't make any more land, Time to buy something is when its for sale. He was well to do. Another one said never be to proud of anything you buy at an auction as you already paid more than everyone else thought it was worth.
 
Hmmm, run out and take out a quarter million dollar mortgage? Great advice when you're giving it to someone else, how many here would really do the same thing even though they say to go for it?
 
Seems to me every time I had an opportunity to buy farm land it was always at an all time high.i can thank of several times I passed up decent farmland because it higher than ever and is going to start coming down any day now.that was at less than 500 per acre.My thinking is as long as this country has this 20 trillion debt that cash will continue to lose its worth. I don't think interest rates will return to 80's rates. Just my 2 cents worth.
 
When you say "buying land as an investment" to me that implies that you're looking for a return on that investment.

HOW exactly do you want that return? This is key to the whole decision.

A.) Is your hope that eventually the rent will rise enough to cover the payment and, of course, eventually there will be no payment so the rent less a few expenses will all be profit someday?

or...

B.) But the land, hold for the price to increase and sell. Essentially a flip, albeit with a longer holding term.

Obviously, both plans have risk and potential reward.

To me the biggest question is that of rental prices. As another poster mentioned, the BTO will almost certainly want a big cut in the rent. Do you have any other potential renters waiting in the wings AND an actual price they will pay?

If you don't already have a plan B and plan C for a renter at a price that works for you, then I see this as a huge risk. Your whole plan is contingent upon a certain rent price, beyond that you're operating at a loss that you may not be able to absorb.

BTW, for those who say land prices never come down, in Minnesota, on average, both cash rents AND land prices have gone down in the last 3 years. People tend to just look at what one local parcel went for and use that to base all prices on. Individual parcels are meaningless because motivations can be all over the map as to what 1 single buyer will pay for the 160 acres adjacent to what he's already farming.

You have to look at the big picture of both land price trends and rent prices. Both of those are down on average. If you look at the mid and long term ag forecasts, there is little to no relief in sight as far as big increases on commodity prices.

If the OP wanted to farm the ground, it would be one answer, but when I look at all the other investment opportunities out there, the ROI on farmland cannot come close to competing with the ROI on paying down other debt and then investing in tax-sheltered or tax-deferred investments.

Grouse
 
The 1980's seem to be forgotten by lots of people....It was brutal in my area....I lost 5 good neighbors that farmed from 600 to 1500 acres each.....Farm land values fell by half or more and it took 20 years to regain its 1980 value..
 
I would NOT buy any land that I could not put at least 50% down, I think most banks would agree and not provide that financing.

So 80 acres @ 3K = 240K, so you would need at least 120K down payment.
 
Are you sure you can finance it with just 10% down? Maybe its regional thing, but around here most lenders want 20 - 25% down on farm land unless you qualify for some type of young farmer / start up loan.
 
I had time to think about this a little more, plus read your post closer too.

I would have to recommend NOT buying this property at this time. Here are some of my reasons:

1) You already carrying debt on a another "investment" property (House).
2) The land is currently renting at an above market rate. I would bet it is more than likely going to drop long before it would go up.
3) Your also talking about financing it for 30 years to make your numbers work. I would NEVER recommend someone finance anything for 30 years. 10-15 is the best and 15-20 is not terrible but 30 is a deal killer.
4) Your thinking a 10% down payment will work. I do not think it will unless your going to tie it to some other asset. Banks know ground is more than likely going to drop in valve in the short run.
5) You stated that your winding down your farming operation because it is not profitable. Do you think that will change in the future??? We are coming off of record high prices for the last 6-8 years. The profitability per acre will take time to stabilize.
6) The ground is Close but not right next to you. So It loses the next door factor to me.

I would look at it this way. If you pay your $24K towards reducing your current debt you will be getting a return equal to the interest rate your currently paying.

We are in kind of the same spot on some ground. We are farming it and have been for 8-10 years. The older brothers that own it are "Thinking" of selling it. Their asking price is lower than it was 2-3 years ago but it would still be double what it was 10 years ago. We all think it is going to get cheaper sooner than later. The landowner and us are playing chicken right now on seeing who jumps first. The only thing that is keeping it from selling right now it they can not put the money in anything else right now and get the return they are getting on the land. Plus the land is fairly inflation safe.

So we are waiting for awhile and I would recommend you do too.
 
I don't want to influence you either way because only you can make the best decision for you. I don't see land prices going down long range although there may be a dip from time to time. What has land values done in your area over the past several years is one criteria you can use. Also, any land investment can be a good investment but it will take years most likely for it to look that way. One usually has one chance in life to buy land that adjoins him or is close by. I have bought a few parcels and 3 farms over the years and have never been sorry. Most of that buying was for self preservation to keep something from coming in close to me that I didn't want. There is one farm that I wish I had bought that I didn't. If you can pencil it out without jeopardizing your family it will likely be a good investment in time. Here's the thing with me. I don't plan on selling any land I have bought but will pass it on to heirs. Therefore, I will not realize the increase in value but I will have the receipts over the years to offset the cost. Good luck on making the best decision for you and whatever you do don't fret about it for years. Life is too short and the time will come for us all that it will eventually belong to someone else anyway.
 
(quoted from post at 08:00:06 01/14/19) You can in parts of western MO and eastern KS...$3000-4000 per acre will buy land that grows 30-40 bu beans and 120-150 bu corn..In a fantastic year bean yields can be 50-60 and corn 180-200 but not that many years ago the corn made 0....I was in a dry pocket in 2018 and the corn made 80 and the beans 25..
Click to expand...

Add in South Dakota....I have 120 acres of farm ground there that I would be happy to get $3000 an acre. It was a good year this year, it probably produced close to some Iowa land....
 
Those numbers are interesting compared to where I am. We are close to a town with a strong economy and farm ground with some woods and ravines is prime for a neighborhood and $500,000 homes. To keep a neighborhood from popping up across from me I went in deep, way deep on 87 acres, with 7 of that in woods. But, I have two offers from guys worth 5+ million if I want to sell. I just want to do my real job and see corn across the road. Is it a good idea? Probably not, but I?m happy and my wife has the guys numbers and a good realtor to call if I died tomorrow and she needs the money. My point is everyone?s situation is different and it?s tough. If it doesn?t feel right and can put you in a pinch with no way out, I?d pass. But, $3000 is unheard of around here and rates are historically low. Land here is 5 digits.
 
My $0.02 worth would be if you can afford to buy it without doing anything with it, make the deal. If being able to do it relies on renting it out, what kind of pinch does it put you in? Nearing retirement? I know no risk no reward, but if things went south, do you have enough time to recover?
 
With inflation, a $100 in 1980 is worth about $325 today. But of course $100 then was none the less a lot of money to you, me, and many others. What did you pay per acre for your place when you bought it if you don't mind saying?
 
I have to agree with JDSeller and recommend against this purchase. Land here has corrected in price from $11K+/A to around $7K/A in the last five years. At least one of the BTOs has gone bankrupt and the even BiggerTO that bought all his stuff is struggling to make payments. Another pair of brothers split up and one is struggling with his three kids to farm 6-7000 acres.

Your operation was not profitable, making it a larger, not-profitable operation makes no sense.

You have other debt- I LOVE land as an investment, but NOT when highly leveraged- what can you cut to make these new mortgage payments if you can't get 75% of current rent, and will that cause you to default on this loan or, even worse, your own home mortgage?

Right next door may warrant a 10% premium, but not much farther.

Fifteen years ago the 40 acres next door went to auction, two BTOs were outbid by the local hot-shot car dealer (with family farming ties) at $6K/A. He tried to develop it for houses, but couldn't get it to qualify. Put it up for sale at $12K/A, has been rented for corn/beans with no buyer wanting that. Still for sale, the sign blew over a couple years ago and still lays out there. Neither BTO is willing and they farm within a few feet of this spot. I'm sure he wishes he never saw the place.
 
I did not buy most of it I inherited it from my parents. But back when my dad started buying the land he paid $250 PER ARCE. years LATTER I BROUGHT ANOTHER 12 ARCES and I paid around $850 per acre then. As of right now it is all paid for other then the rent I have to pay the government every year
 
I did that over 25 years ago. Got to make money with the farm, them my back got so bad I couldn't ride the tractors. I sold it, made excellent money on it. I'm not sure you could do that today.
 
If you buy it you could possibly make extra payments to cut your pay off time considerably.
Land is usually a once in the lifetime chance to buy. With that being said I m not so sure it is a good plan at this time. Land around me in MI has not changed a whole lot up or down. Some is being bought and none is really seeing the realtor to get sold. I think I would set this one out for closer dirt or cheaper price. You might get to buy it in a couple of years for less after the guy that buys it goes broke.
 
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