Buying farmland is a common way for farmers to expand their operations and, ideally, increase revenue. However, knowing when to buy more land and grow their production is not a decision to be rushed.
For instance, while the added land should produce more, the revenue from that production needs to be able to outpace the expenses that additional land and larger operations incur. That way profits do not suffer and the farm business can remain healthy.
Still, even if the path toward better revenue and profits seems clear, there’s the issue of having the funds needed to buy the land in the first place. Without having a financial plan in place, the transaction very likely will not happen.
So, how does a farmer or investor know when it may be a good time to pull the trigger on a land purchase to grow an operation or investment portfolio? Well, we’ve gathered a few tips and recommendations that may shine a little light on the subject.
When cash flow is not a problem
For both farmers and investors, whether or not now is the time to buy more land could likely come down to whether or not their business or investments have adequate cash flow to cover the purchase, make needed equipment or other improvements and to, of course, operate the land. Buying land – even for investment purposes – could easily still affect the business end of a farmer’s operations.
That’s why even if buying the land would seem like a decision that pencils out, it is still a good idea to put in the time to do the necessary research and due diligence. That involves taking a very close look at cash flow.
Also, it’s a good plan to have stored a large enough source of cash for a downpayment that is significant enough to establish annual payments that will not put extra financial stress on the farmer or investor in the coming years.
Prepare a cash flow statement
One way to determine whether cash flow may be an issue or not for a planned farm expansion now or into the future is to prepare and analyze a cash flow statement. This statement is a summary of receipts, or inflows, and expenditures, or outflows, for a farm’s business operation during a set period of time.
The cash flow statement can be used to help get a better idea of long-term projections into the future. This is often referred to as a cash flow pro forma. The pro forma’s purpose is to research the farm’s sales trends and its revenue expectations. A pro forma can be created for any land that a farmer or investor may be interested in purchasing. This will help the potential buyer figure out whether the land could produce enough to help meet goals and objectives of the overall business.
In addition to helping with land purchase decisions, cash flow statements can also help identify problems and project cash surpluses and shortages. Learn more about cash flow statements and their many uses in this document (PDF) from Colorado State University Extension.
Ask what makes the most financial sense
Once the financials are in order, a farmer must consider a whole list of financial factors.
If a cash flow pro forma has been created, then does that data suggest the land is worth the asking price? What’s the land appraised for? Have comparable sales been researched? Those are just a few of the questions that need to be answered in this process.
Both farmers and investors should also speak with their bankers on whether using all cash is the best way to move forward in a sale. Since farm is an illiquid asset, making the purchase will have an impact on the farm’s liquidity. A banker will be able to help navigate this issue and make sure the buyer comes out on the other end of the transaction with enough working capital.
Preparing for retirement
When a farmer or investor is looking ahead to retirement, buying farmland may be a wise investment choice.
In fact, most farmers believe that farmland is either a good or extremely good investment, according to a recent study from Purdue University. Other reports have shown that, over time, the possible returns yielded by productive farmland compare favorably, in general, to other retirement financing options, such as relying on traditional stocks.
However, this strategy requires a good deal of planning ahead. Active farmers must be honest with themselves and think about how long they expect to remain active, especially where debt is concerned. It may be wise to speak with a financial advisor or farm management partner to get a plan in place well enough in advance.
Land supply is low, but demand is there
You aren’t the only farmer or investor thinking about buying farmland. That’s a promise. There is plenty of buying interest out there, but the problem is there is not a whole lot of land on the market.
Interested buyers are fairly easy to find for good land because of how valuable it is. But at the same time, that value gives potential sellers plenty of reason to hold on to the land, unless they are retiring or trying to work themselves out of financial trouble. Neither of those situations is rare these days.
That’s all to say that it’s a good idea to have a plan in place in case high-quality land that’s of interest does come onto the market, as buying it will likely be a competitive process.
Get the Advantage today
Ready to make a decision on buying farmland? Get the advantage of having Advantage Realty & Land Management working on your side by contacting Sam Harper today.
Working with land owners and investors alike, Sam specializes in land management, crop consulting and real estate services.
As a full-time real estate business offering services as a broker in Iowa, Sam and his Advantage team can go to work for you in marketing land, negotiating on your behalf, locating buyers or sellers, arranging for closing and much more.
Get the Advantage today.