To rent or own farmland

If you’re looking to expand your acreage for increased profitability, one of the first things you’ll need to decide on is whether you will rent or lease your farmland or purchase it outright. 

And it’s not a decision you can make lightly – what you decide could be the make or break of your profitability. But by really looking at the positives and perils of each decision, you can assess risk vs. reward ratios more effectively and decide the best route to go for your particular situation. 

Here are five of the most important factors to consider when you have to decide whether you should rent your land or take the plunge and purchase.

Factor #1: Types of Leases

If you’re considering leasing or renting land, it’s imperative you fully understand the terms of your agreement:

  •    Short-term leases generally last for one to three years and may be renewed.
  •    Long-term leases can cover time periods up to 99 years.

Choosing a short-term lease can give you added flexibility as you get through those first few years and make any necessary adjustments. Short-term leasing arrangements are more readily available, which means you may have more choices on land in your area.

If you’re a grower who already has a clear idea of what you want in terms of acreage and layout, a long-term leasing arrangement may give you valuable stability while providing security against inflation in the real estate market. Of course, it goes without saying that you’ll want to be sure you avoid getting locked in to a long-term commitment at an excessively high rental rate. This could leave you stuck if real estate prices fall or demand weakens in your region.

Factor #2: Current Real Estate Pricing

While real estate prices have been slightly less volatile since the catastrophic bust of the housing bubble in 2007, waiting for the right moment to buy can potentially save you thousands, maybe even tens of thousands, of dollars on the right parcel of farmland. If the market is high when you’re looking, opting to rent until prices come down may help you stay profitable while you search for the right piece of land in your area.

Interest rates should also be considered as they’ll likely have a significant long-term impact on how financially viable your operation is.

Factor #3: Flexibility of Operations

Depending on the type of farming operation you’ll be running, the choice between renting and purchasing property may be more obvious. For example, if you plan to rotate or change the crops you grow, renting acreage that’s suitable may offer you much greater flexibility than purchasing property outright. 

The downside, of course, is that property may not always be available to suit your needs in your area. Short-term leasing arrangements can be terminated at the end of any contract by either party, and if the land owner decides to terminate your lease, you could be left without any acreage at all. 

Factor #4: Scarcity of Land

In today's ag industry, not everyone has the capital to purchase land outright. This has led to significant demand for agricultural rental properties in some areas of the U.S., which in turn has driven up costs for prime farmland in those areas. By researching the average rental rates for various properties in your area, you can get a fairly clear picture of the price you’ll likely have to pay to rent or lease a piece of land. You can find this information through a number of sources:

 

  • Local real estate agents may have figures on the average lease amounts for farmland in your area.
  • The National Ag Statistics Service offers an extensive overview of more general data through their website, which can be a valuable resource for growers and farm managers.
  • Consulting with other growers and managers in your area can also provide you with ballpark figures you can use to determine the right rental range for your acreage.

If you live in an area with high demand, it may cost more to rent, in which case purchasing your property might be more appealing than competing for available rental properties. In some cases, if you have limited financial resources, waiting for better economic conditions could be a more practical solution.

Factor #5: Consider the Available Options

The size and potential use of the land that’s available can have a significant impact on your decision to purchase or lease your acreage. Even smaller parcels of land can be put to good use and be financially rewarding in certain situations. If risk is a major concern, renting a smaller piece of land and maximizing its potential may be a good way to go.

  • Tobacco growing operations typically require plenty of water but only a small amount of acreage; as a result, you may be able to find smaller parcels of land at a bargain price.
  • Farms that grow organic produce can also make good use of smaller amounts of acreage to achieve profits in the agricultural marketplace.
  • Livestock and hunting operations can often be implemented in hilly or wooded areas that might be less desirable and less expensive to rent than comparable pastureland or cropland.

Even if these properties are not currently for sale, the owners may be willing to part with them if approached in the right way. Leasing or purchasing these types of properties might save you a great deal of money on rental fees and overall costs of bigger parcels, allowing you to achieve higher profits even during the first few seasons of growing on the land.

Making the Final Decision

Determining whether to purchase or lease farmland most often comes down to a financial decision that ultimately requires due diligence. There’s also one last important point to consider, “the landlord factor” – when you lease or rent land, you’ll likely be dealing with the landowner at least occasionally. If at all possible, make it a priority to meet a potential landlord in person so you can get a sense of whether or not you’d be comfortable entering into a contractual land agreement with them.

By weighing the pros and cons, you can feel confident you’re making the best decision for your expanding farming operation, which ultimately means you’ll be able to enjoy greater financial stability and increased confidence when managing your acreage now and far into the future.

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