40 acres of farmland?

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jonplatte
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40 acres of farmland?

Postby jonplatte » Thu Mar 28, 2013 8:26 pm

My wife and myself are inheriting 40 acres of farmland. We plan on renting this out to a farmer near us. My wife's sister is also getting 40 but has no interest in keeping it. Should we buy her land from her? Land is worth around $3500 to $4000 an acre for good farmland where we live, which this land is. Rental for the land would be $150 to $200 an acre per year. We would have to finance almost all of the purchase. Taxes would be roughly 3000 per year per 40.

toolcrib
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Re: 40 acres of farmland?

Postby toolcrib » Fri Mar 29, 2013 5:33 am

Based on the numbers presented I do not see this land as a great investment. If the land is expected to appreciate in value at a rate of 4-5% a year then it would be a lot better. I did some simple calculations to show what this will look like.

40 acres at $3,500 to $4,000 has a present value of $140,000 to $160,000
Taxes are $3,000 per year.
Rental of the land will pay between $6,000 and $8,000 per year.
Profit after taxes will be $3,000 to $5,000 per year.
Based on the range of profit and present value this will get you an APY of between 1.875% and 3.571%.

These returns are better in line with a 5 year CD and land is generally considered a safe investment, so the decision on whether to buy the additional 40 acres or keep you current 40 acres should depend more on how your current savings/asset allocation looks.

I can only give a viewpoint from my own perspective, and that is of a 32 year old with a long time horizon before retirement starts. I would likely sell the land and invest the money, unless the land was in an area where I could reasonably believe that it will appreciate in value. I would not consider borrowing to buy the land unless I got a rate below 4%, as even that value would result in this investment costing me each year until I got the LTV down to around 50%.

I hope that helps,
Andrew

Northern light
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Re: 40 acres of farmland?

Postby Northern light » Fri Mar 29, 2013 6:40 am

toolcrib wrote: I can only give a viewpoint from my own perspective, and that is of a 32 year old with a long time horizon before retirement starts. I would likely sell the land and invest the money

Me too. 1,9 - 4,3% ($3.000-5.000 divided by $140.000-160.000) yield gross is pretty meagre. Where I live farmland has increased in value faster than the yield of the land last 10 years (in pace with lower interest rate) and you don´t need to be a economics professor to realise this is not a long term trend since interest rate can´t be lower than zero.

I would say the investment you are looking at would be interesting if it yielded 5-6% over 10 years, from a financially solid farmer. In order to get that yield you would have to buy the land for $ 50.000-100.000 (depending on what long term rent you could get from it).

As of today I would rather buy competitive, profitable blue chips with strong balance sheets and a nice dividend (>3%).

Tightwad
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Re: 40 acres of farmland?

Postby Tightwad » Fri Mar 29, 2013 3:22 pm

I say buy it especially if you can get it for a little less per acre. This rock we live on only has so much usable farmland & grain is a commodity that is sold & traded around the globe. With a billion+ Chinese who are becoming more Americanized each year, that rent amount is likely to continue to grow as diets change. Also consider that you can possibly rent the land out for hunting which would be a little extra money.

RayinPenn
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Re: 40 acres of farmland?

Postby RayinPenn » Sun Mar 31, 2013 4:33 am

While I am about as debt adverse as a person can be his may prove to be a
good long term investment. I like a passive "set it and forget it" investment. Buy the land and let inflation do the rest. Kinda sweet!

1) what terms can you get on the mortgage?
2) what is the likelyhood you will be able to rent the land? Is it the farmer next door? Or is there a real rental market?
3) what is your financial situation otherwise? Home owner? Emergny fund? Any consumer debt?

My dad always said "land - they aren't making any more of it you know"
RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain

jonplatte
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Re: 40 acres of farmland?

Postby jonplatte » Sun Mar 31, 2013 6:26 pm

Tough decisions all over. I was thinking it would be great to have a solid passive income in retirement along with a nice asset that needs little to no work. What is nice is the income from the rental will be practically garaunteed until the day we die. It is damn near a pension.
Of course, if we sell our 40 now and forget about the sisters 40, we could pay off our mortgage and be debt free at 31 yrs old. Hmmmm....


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