Are you ready to buy farmland? Here's what you should consider.
Buying farmland is a major opportunity. Not only does more land mean the potential for larger business operations – and hopefully higher farm revenue – but it also could be one of the wisest long-term investment decisions a farmer or investor can make.
Still, making a decision to buy farmland is not one that should be hurried. There are many factors to consider, questions to ask and research to be done before anyone – farmer, landowner or investor – should make a land purchase.
If you are ready to put in the time and effort, though, buying farmland can certainly pay off in the long run and sometimes right away, too. However, let’s go over the bulk of what should be considered before making such a significant decision.
Why buy farmland?
Farmland is an attractive opportunity for both farmers and investors. Farmers are able to expand their operations, whether that be livestock or crops, and sell more of either. As for investors, they are able to set themselves up for even larger returns on their investments down the road.
An additional reason why someone could be looking to purchase land is that they are a beginning farmer and seeking to start out. However, many beginning farmers may also look to lease land from a landowner as this often is easier to manage financially for a new farmer.
Who is buying farmland now?
As we prepare to turn the page on 2020 and enter 2021, it can be helpful to look at who has been actively buying farmland. This can provide a glimpse of who else in your area may try to buy land and possibly pose as competition for a purchase.
In Iowa, one of the go-to sources for seeing who is buying farmland, as well as keeping track of other key indicators for the state’s agriculture economy, is Iowa State University Extension and Outreach’s Farmland Value Survey. The survey was most recently updated in November 2020, so the figures provided are timely and relevant to anyone looking to buy farmland now.
Most buyers are farmers
In Iowa, most buyers are existing farmers, according to the most recent survey results. In fact, the survey’s collected responses indicate that 72% of land sales during the survey’s time period went to existing farmers.
Of buyers who were farmers, the survey shows that 69% were local farmers, 4% were new farmers and 3% were existing farmers who were relocating to the area of the transaction.
Other buyers also purchased land, though. Investors were the buyers in 22% of the transactions.
Farmland is a good investment
If you are an investor looking to buy farmland, then you likely know that farmland has typically outperformed other types of investments, such as the stock market. It is also less volatile than stock markets or even gold, and its value does not often correlate to stock values.
The value of farmland is in many ways propped up because of its general low level of availability. Not many people are selling land right now in many parts of the country. So, simply from a value standpoint, farmland is sometimes more secure than other traditional investment types.
One of the other benefits of investing in farmland is that it can provide returns even before the owner seeks to sell it. In fact, many investors hold onto farmland for many years and pass it on to the next generations in their families because of this. Those returns are often realized by either working the land themselves as part of their own operations or leasing the land to tenant farmers.
Still, any investor should speak with a farm management service provider or a financial advisor to see if land fits in their portfolio and future plans.
Buying farmland is not like buying other property
It is important to remember that a real estate transaction and lending process involving farmland does not resemble most types of property purchases. For example, financing a farmland purchase is nothing like securing a mortgage for a home.
One of the key differences is that a loan for land usually must be paid off in a shorter amount of time. Often, this period is three to five years, which obviously is much shorter than a 30-year or 15-year mortgage term. Add on top of that the facts that both your down payment and interest rates for a land loan will likely be higher.
For potential land buyers, this means making sure finances are in place can be a little more tricky.
Do you have cash available?
This is a very important question to ask before entering any sort of transaction involving land. Some experts will recommend that cash be used to purchase land because of the shorter loan terms as mentioned above. However, this doesn’t mean that you can’t explore options to pay for the transaction in part with cash and take out a loan for the rest.
It is always best to keep any sort of debt to a minimum, though.
How financially healthy is your existing operation?
Farmers looking to buy more land will also need to evaluate the finances of their existing farm operations and look closely at cash flows before and after any purchase is made.
Consider what other types of investments you may need to make, such as equipment upgrades, and weigh that against what a significant purchase such as more land may mean for your business. If the new land suggests it could pay for itself quickly and still allow plenty of room for the operation’s other needs, then maybe it is a good idea to go through with the purchase.
Again, though, this is where an advisor or banker should be consulted.
Is quality land available?
High quality land is available in much of Iowa and the rest of the Midwest but what about in your specific area? Look into soil quality, water sources and other factors that can impact quality.
Don’t rush into a transaction without researching the land.
Learn what your farm is worth
How long has it been since you’ve had someone estimate the value of your farm? This knowledge is invaluable, so reach out to us today for a free real estate evaluation.