Here's when to consider buying farmland
Buying farmland is an investment that can pay off, but it is by no means a simple investment strategy. If done right, investing in farmland can lead to income through production, a potential offset in annual taxes and portfolio diversification.
There are many factors to consider before buying more land to farm or invest in. Much of the end decision can come down to timing, which vary farmer to farmer, or investor to investor. And that decision probably should not be reached without first consulting a trusted professional, such as a financial advisor or farm real estate professional.
However, when it is time to put the first foot forward into the farmland market, here is what to consider to help you determine if the time is right.
It’s time to grow the business
Recent surveys have shown that it is farmers who are buying land, more so than investors.
The 2018 Farmland Value Survey from Iowa State University Extension and Outreach found that most farmland sales, about 72 percent, were to existing farmers. Of that percentage, 69 percent of the land sales went to those who already farmed locally, while 3 percent of the sales went to farmers who were relocating.
In some cases, these land purchases could be due to a family member coming home to help on the family’s farm. This common situation can help allow the farm operation to continue to grow well into the future.
However, before jumping into buying farmland to grow the family operation, hopeful buyers must think long and hard about how additional land could affect the cash flow of their business. Emotions can complicate this part of the process. It may be best to bring in an advisor to help work out the math.
You are ready to invest
In ISU’s 2018 survey, 21 percent of land sales went to investors. Wise investors realize that buying farmland comes with several benefits. Aside from increased production opportunities for farmers, there are investment benefits, as well. It’s a good strategy for building wealth or save for retirement, for example.
Many financial advisors tell their clients that investment is a great way to diversify a portfolio. Land values won’t drop with the stock market, giving landowners a bit of a safety net in that regard. In addition, land is limited, which helps prop up its value.
Once the decision to purchase land has been made, the owner has plenty of options. The owner can farm the land themselves, lease the land to a tenant farmer or hold on to the land and sell it when its value increases.
But land investment does have a few potential disadvantages. The taxes involved can get a bit complicated, for example, so any investor will want a good tax professional in their corner. Landowners must also keep in mind the previous uses of the land, which can determine how it can be used in the future - potentially limiting certain revenue sources.
Finally, land investment often is a long-term strategy. It can take a while - years in some cases - for the investment to result in solid returns.
When land is available
The farmland market is tight - very tight.
With that in mind, any farmer or investor considering a farmland purchase may want to keep an eye out for available land due to the simple reason that opportunities can sometimes be few and far between.
As the ISU survey notes, the farmland market has been tight recently, specifically within the last five years. Sales are happening less frequently in that span. In the 2018 survey, estate sales and sales by farmers who are retiring were listed as the main sources of farmland sales.
Only 28 percent of those who took the survey reported that they saw an increase in sales activity compared to 2017. That is compared to 34 percent who sale there were fewer and 38 percent who said the number of sales stayed close to the same.
So, in light of the tight market we are seeing right now, it makes sense for those looking to make a purchase to keep their eyes open and inquire about any opportunities that arise, especially in their local areas.
How to find the right farmland to buy
There are several farmland selection factors that must be considered when determining whether to make a purchase. Those factors include knowing how much land the buyer can afford, whether the investor is comfortable with farmland investment being a long-term payoff and how much emotion is involved in the decision-making process.
Now, when it comes to assessing how much land a prospective buyer can afford, it is best to consult a professional with experience in agricultural land. For buyers who will have to acquire debt to complete a land purchase, working with an experienced lender is likely the best route.
From there, finding the best farmland to buy comes down to knowing what questions to ask. There are questions the buyer must ask themselves and experts, too. Some important questions to find answers to include:
- For farmers or those who already own land, what is your financial condition - both personal and business?
- Do the potential returns from the land match the buyer’s needs?
- How much should the buyer rely on cash vs. loan to make the purchase?
- Does the buyer know every valuable detail (appraisal, amenities, infrastructure, access, water source, etc.) about the land?
Find a farm real estate pro
Farmers and investors who are looking to buy farmland should always keep all these factors in mind. It also helps if they have an experienced farm real estate professional helping them along the way, making sure all the details of the land being considered fit into the farmer’s or investor’s goals.
If you would like to partner with a farm real estate services leader that has a track record of success in the agriculture industry, then contact Cotton-Grave to discuss your goals. Cotton-Grave has been a leader in Iowa, Minnesota and South Dakota since 1960. Buyer or seller, our expert team is ready to support your next land investment decision.
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