Farmland

[2forISU]

I'm looking at a couple of investment options (multi-units), but one of them that has been sent to me by a realtor is farmland. I have little knowledge in land and never thought about adding land to my portfolio. There is 86 acres (roughly 80 acres tillable) of land that has CRP contract through 2026 which pays out annually at $21K. They are asking $6,900 an acre for the land and is resides in North/Central Iowa. Your cash-on-cash return looks terrible, so why would this be attractive to an investor? I'm strictly looking at this as an investor (cash flow), not as a farmer. Maybe I'm missing the bigger picture but why would this be a solid investment...


Just out curiosity, why would a farmer want this if he can't do anything till 2027?

 

[nfrine]

Not sure why anyone would be interested....where did you say it was?

 

[2forISU]

Not sure why anyone would be interested....where did you say it was?

Between Mason City and Waterloo

 

[buf87]

Depreciation on tile & fence.
Hope land appreciates in value
Can CRP payment make most of annual payment?
Is it farmable after CRP term is done?

 

[uthaman]

I'm looking at a couple of investment options (multi-units), but one of them that has been sent to me by a realtor is farmland. I have little knowledge in land and never thought about adding land to my portfolio. There is 86 acres (roughly 80 acres tillable) of land that has CRP contract through 2026 which pays out annually at $21K. They are asking $6,900 an acre for the land and is resides in North/Central Iowa. Your cash-on-cash return looks terrible, so why would this be attractive to an investor? I'm strictly looking at this as an investor (cash flow), not as a farmer. Maybe I'm missing the bigger picture but why would this be a solid investment...


Just out curiosity, why would a farmer want this if he can't do anything till 2027?

$21k annual payout at a purchase price of $593k gives you around 3.5% annual return. That sounds about right to me for ROI on farmland.

Is it a good investment? Depends on what you are looking for. That 3.5% is guaranteed. And new land isn't being created, so supply is somewhat limited...

 

[2forISU]

Depreciation on tile & fence.
Hope land appreciates in value
Can CRP payment make most of annual payment?
Is it farmable after CRP term is done?

Depreciation on tile & fence. Minimal impact
Hope land appreciates in value-Not sure what this is....
Can CRP payment make most of annual payment? If you put 25% on $600K piece of land, you are going to have roughly $2600 payment per month, Leaves you with roughly $10K that you are paying.
Is it farmable after CRP term is done? Yes

 

[buf87]

Hope land has bottomed out & will increase in value

 

[buf87]

Seems like land seldom pencils out when buying farmground

 

[Tri4Cy]

$21k annual payout at a purchase price of $593k gives you around 3.5% annual return. That sounds about right to me for ROI on farmland.

Is it a good investment? Depends on what you are looking for. That 3.5% is guaranteed. And new land isn't being created, so supply is somewhat limited...

This. Wish interest rates so low farmers are not sitting on cash. They'd rather invest in something else. A 3.5% ROR is better than cash at this point and it's something they know/are familiar with. Hell, I remember a few years ago I believe a farmer in NW Iowa paid something like 20k per acre to store manure. Doing the math it was cheaper for them to pay that price/acre then the alternative shipping costs.

 

[Stormin]

I'm looking at a couple of investment options (multi-units), but one of them that has been sent to me by a realtor is farmland. I have little knowledge in land and never thought about adding land to my portfolio. There is 86 acres (roughly 80 acres tillable) of land that has CRP contract through 2026 which pays out annually at $21K. They are asking $6,900 an acre for the land and is resides in North/Central Iowa. Your cash-on-cash return looks terrible, so why would this be attractive to an investor? I'm strictly looking at this as an investor (cash flow), not as a farmer. Maybe I'm missing the bigger picture but why would this be a solid investment...


Just out curiosity, why would a farmer want this if he can't do anything till 2027?

CRP rent on the 86 acres is $244 per acre. That is not bad cash rent. $6900 per acre paid means you are getting a gross return of about 3.5% before property taxes. If you figure $20 per acre land taxes, that means a net of $224 per acre and almost a 3.2% return on investment. And I would look closely at the soil types and erosion. What kind of CRP program? Wetlands CRP coming back into production could have some sizable costs for restoring drainage to the property.

What will happen with future interest rates and inflation?

Land is a hedge against inflation. Depends on how much money the farmer has. I thought the prices back when land was bringing $12,000 per acre were insane. Lots of farmers threw away a lot of easy money they got when corn prices doubled for a couple years. Can’t lose money any faster than paying $12,000 per acre and lose about $1,000 per acre of equity every year from the inflated price.

 

[ArgentCy]

I'm not sure whether farmers ever look at actual cash returns. Land is funny and I don't think the final investment return is much of a purchasing decision.

 

[CTTB78]

......There is 86 acres (roughly 80 acres tillable) of land that has CRP contract through 2026 which pays out annually at $21K. They are asking $6,900 an acre..... Maybe I'm missing the bigger picture but why would this be a solid investment......

Depends on your portfolio. Big money investors who are looking at buying Iowa farm ground are already heavily invested in the market (stocks/bonds) and are looking to diversify. Conservative investment with appreciation upside.

 

[2forISU]

Depends on your portfolio. Big money investors who are looking at buying Iowa farm ground are already heavily invested in the market (stocks/bonds) and are looking to diversify. Conservative investment with appreciation upside.

That's fair and makes sense.

 

[2forISU]

I'm not sure whether farmers ever look at actual cash returns. Land is funny and I don't think the final investment return is much of a purchasing decision.

Based on the responses I have seen so far, I would say the cash-on-cash return is not a factor. Seems like if you cover your loan with the rent you're receiving, you are good.

 

[buf87]

There might be costs with maintaining CRP. Does it have to be mowed every so often?

 

[ArgentCy]

I would guess you are looking at commercial properties which usually have cap rates at what, about double that in the 7-10% range.

 

[CascadeClone]

I had teh same opinion about 10 years ago on a similar property when my Grandma passed. From a straight investment perspective, it made no sense. The cash rent was nowhere near what you needed to pay the mortgage. And if you paid cash up front (assuming you had $1M or whatever), then the return from the cash rent was still like 2%. At the time a CD paid better (doesn't now of course).

I think it is more about planning to have the land for a generation or so, and/or just wanting to own land. You can hope for appreciation either as a result of / hedge against inflation, so there is some upside potential anyway. Otherwise, compared to say, a fourplex rental, its a totally different deal and makes no sense. A fourplex you can get to play for itself over time. Land not so much.

 

[Stormin]

IMO Land is better than gold as far as an investment. But lots of people invest in gold. What kind of return is there from a dozen gold bars on your desk? You are absolutely speculating that the gold will inflate in value and then plan on selling it when it increases. Land has a rental return plus inflation value.

 

[LincolnWay187]

I find it hard to give farmers any sympathy on bad years when so many are sitting on the kind of cash or land value they own...like have tbey forgoyten they are millionaires?

 

[ArgentCy]

When you take out a million dollar loan to farm for a year, I don't think a million dollars in land value really makes you a millionaire.

The only thing that I can see is that land has no depreciation. All other investments looking for cash returns will have depreciation and maintenance, etc to consider. The only cost that I can see are the far below market property taxes.