Purchasing a piece of ground is no small decision. When you compare current farmland values with crop prices and average annual farm income, buying additional acres can seem daunting. Here are three questions to answer when deciding how much land you can afford.
What Will My Land Loan Payment Be?
At the most basic level, it is important for potential buyers to know how much they’ll be paying for the land they want to purchase. There are a number of tools (like our Loan Payment Calculator) you can use to calculate the real estate loan payments based on the principal amount, interest rate, and term of the loan. Factor in your local real estate tax rates and you’ll have a realistic idea of the cost of owning the land.
How Will I Afford the Payment?
Now that you have a reasonable estimate of your costs, it’s time to decide if you can afford the payments from a cash flow perspective. Yes, you will have access to additional revenue-generating acres, but when you factor in your input costs, overhead, and debt servicing, you may need to find additional ways to subsidize your payment. Whether that means cutting expenses in other areas, providing custom farming services, or generating additional off-farm income, it’s important to have options when making a financial decision of this magnitude.
How Will This Affect My Farm’s Overall Financial Picture?
Understanding your current financial position is critical to the success of a land purchase. Take the time to review your balance sheet, cash flow and income statements to determine how much debt you can reasonably take on. You are in a good position to buy if you can both service the debt and remain profitable. At least on paper.
Just because you can afford something doesn’t necessarily mean you should buy it. Land purchases have a major affect on your operation’s working capital and, if financial circumstances changed, could potentially limit your ability to get your farm out of a tough spot. You should consider the opportunity cost – the things you are giving up in order to make the purchase – to decide if the long-term benefits outweigh the short-term sacrifices. Visit our real estate loans page to learn more about purchasing land.
Summary
Purchasing farmland is an important, emotional decision. The key to making it work is staying grounded in the numbers and knowing what you can realistically afford based on your business. Work with your lender to find the loan terms that work for your operation and consider the ways you can subsidize any difference between the additional income and your payments.
