Posted 11/9/2012 09:47 (#2687524) Subject: Since land is hot topic today
I'm a younger beginning farmer and please help me understand some things. Obviously everybody would like to own as much of the ground that they farm as possible. As stated in some of the other posts its getting very hard for a young guy without alot of long term assets to buy ground without taking on risk that could easily bankrupt the operation -- I currently dont own a thing as far as land is concerned, but all of my ground is family owned. I will inherit most of it within the next 10-20 years. So last month I had a friend approach me whos in a similar situation -- with the opertunity to buy some 15k ground. We ran some numbers and for me it all comes back to how much will the land appreciate in value over the next 30 years. For instance: if land were to average a 5% return over the next 30 years - figure rent would increase proportionately -- the owner would have as much invested in the farm as the renter -- so a nobrainer -- after like year 15 the buyers land payment would be less than the renters rent payment. However if you have a 2% increase then the renter will have actually saved enough money (in theory) to pay for 1/2 the acre at year 30 and it would take till year 45 until they got close to spending similar money- so the renter even earning 0% at the bank would be ahead for 45 years. I figured this using loan tables and figuring that the principle must be paid for by after tax money where as rent would be pretax dollars -- If you played with the tax percentage number it changed things alot. (so if you had a $100 principle payment it actually costs $120-130 depending on tax rate) Obviously in the last 5-6 years when land has been averaging a 20-100% increase in value annually it works really well anybody who bought. So I guess what I saw (remember for both of us the land has to "pay" for itself by robbing from other acres we farm) is over the long term the main thing I have to look at is the expected increase land value- with interest rate and tax rate also playing in as factors. Id appreciate thoughts on this analysis -- I have a spreadsheet but its on another computer -- I always wondered this cause in my area NW Ia - the BTO's have the theory of renting alot of ground while the small family farms are buying. So my analisys was desigend to take the emotion out of a decision and look at it as a strictly farming business decision. In both scenarios the amount we'll pay for land in 30 years was jawdropping - as well as rent. Then if you figured proportional yields for corn and a linear increase in corn value to the value of land (so net income would be proportional to today - x % of land value, x% return on land value) it was truely staggering the amount of money we'll have to handle. Dont grill me on the figures -- this is from memory and I cant look at the sheet till tonight. The numbers I used is land at 15k, rent at $400, interest was 4.65% (i think - used farm credit website) - figured $6 corn. Am I missing something I should add in -- I didnt include property tax - cause it varies by county, and the security of knowing youll have the chance to farm it until death or unable to pay. So just because land is at record high doesnt mean its a good or bad move -- the key is the average rate of increase in value --- an of course being able to cover any shortfalls along the way. I'd apprecaite thoughts on this from guys who've been down the road before.