What's a normal cap rate on farmland?

Question

Farm land seemed to have around a 39% rent to price ratio in Wisconsin. I'm pretty sure it's useless half the year. So it seems like around an 18% pre-tax cap rate. Is this correct? Would you get this if you invested through a self-directed IRA or deducted the income against something.

Lucas Gillmore · Answer

Investing in farmland appreciates at about 2-4% a year but it is every year since 1900 farmland has only gone down once 1988. It didn’t go down in value in 2008-2009 or even in 1929-32. But when it dropped in 1988 it fell 50%.

I would add like Brian Kearney said you lease is very important. If you don’t understand farming there are certain soil test that you will want to have done and specify that they must be kept there. Think of them as mineral rights, and they must be maintained.

Rents are calculated per year not per month and understand not all soil was created equally talk to farmers in the area, they will have a very good idea what happened to the field. Odds are if it it listed on the MLS it is overpriced. Most farmland is sold via auction.

If you are still looking at the land I would suggest that you have a few soil tests taken at the local co-op/retailer they can tell you what if any crop nutrients are missing. Also make sure that the pH is close to 6.5 if that is below 5.5 that is a good indication the land was abused.

Hope I help

Lucas Gillmore Certified Crop Advisor-IA

Account Closed · Answer

If you do decide to rent farmland out, if its crops (corn, soybeans), I would make sure you have a lease that has a yield guarantee.  You don't want someone using the nutrients in your soil, but not doing the correct things to make sure they are put back in to the soil for next year.  This could then make leasing out your land in future years harder, as you have to spend time putting nutrients back in to the soil

Brian Kearney · Answer

Hey Brandon! What got you interested in farmland?

As far as an average cap rate, it is typical between 2-6%. Often around 3-4%. Farmland is a low cash flow business, but very high in appreciation. Overall it’s on par with the returns of the S&P 500, with far less volatility.

If you have any specific questions you can always reach out and I would love to talk to you about it. Most land grant university extensions would also have information for your specific area.

Hope that helps a little!

—Brian Kearney

San Eng · Answer

Hi, just add 2 cents.  We are invested in Canadian farmland.  In past 60 years, it has averaged 10.7% nationwide, though varies by province.   There has NEVER been a down year.   We looked at investing directly but don’t have the expertise, so just invested in one of the top farmland funds here which have been generating 12%+ net of fees.   It’s a long term hold and the returns are combo (sounds like USA) of crop yields low digits plus fast appreciations.   Canada is only one of two major countries in world that BENEFITS from climate change as warm weather helps them.   Russia is the other.   I rather do Canada ;o)

Clint Shelley · Answer

San,

your comment about Canada and Russia benefitting from global warming is something I have never heard of thought of, but you are so right. Very profound.

Clint

Joe Splitrock · Answer

@Brandan Qwert renting farm land has very low return. If you inherited land, it can work out well, but buying just to lease the land is a tough business. There was severe flooding here in the midwest this year and many farmers couldn't even get seed in the ground. They couldn't even get down roads to access the fields. So on top of low return, you have mother nature to worry about.

The land that appreciates around here is in the path of progress, so it is speculation on future value of land close to a city. There is not much land in that path and the premium price is already built in. South Dakota is like 90% farm land, so 900 thousand people with 43 million acres farm land. Most the land is in the middle of nowhere.

Bill B. · Answer

In MN by the South Dakota border over the last 10 years? A little over 0% but not a lot. Pry 50% over the last 20 years. (There was a big run up about 15 years ago and then about 4 years ago crop prices cratered, dropping in about half.)

You definitely need a good lease guaranteeing land returned as rented, (tilled back under and fertilized)

A quarter, about 160 acres, will have about 145 “tillable” acres that will rent between $25k-$35k depending on your yield per acre. unfortunately that land is probably worth $1million. So about 3% per year. Unfortunately that’s about the max a farmer can pay.

They’ll pry get $600/acre worth of corn out ofthe ground, minus: seed, diesel, fertilizer, weed killer, labor, transportation, insurance, crop loss. So giving you $200/acre is a lot. 1/3rd of possible income. If it’s not too wet or too dry or windy, or hail, or etc.  This was the worst year for planting and harvest in 20 years and prices still didn’t go up.

Ps. Don’t let em plant sweet corn or sugar beets. Only soybeans and feed corn.

Brandan Qwert · Answer

So how much is the appreciation?

Brian Kearney · Answer

The appreciation is through a few reasons. The two main reasons are: population growth and greater efficiency.

The worlds population is growing so there is more demand each year for food products. This drives an increase in grain buying, which is how farmers make their living.

The efficiency on farms is going up every year as well. Seed companies invest hundreds of millions of dollars that you get to reap the benefits from in the way of higher yields.As far as a yield guarantee. You absolutely want to make certain that the farmer is increasing the productivity of your soil, not stripping it. I would talk to your lawyer or local extension office about the best way to protect against that in your lease.

—Brian Kearney

Brandan Qwert · Answer

Oh I guess I misread a pdf file. I thought the rent numbers were monthly not yearly. How much is the appreciation? Is it from gdp growth, inflation, or/and land improvements?

What's a normal cap rate on farmland?

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