Purchasing a piece of land is no small decision. When you compare current farmland values with crop prices and average annual farm income, it can be difficult to understand how a land purchase will impact the future of your operation. Here are three questions
to answer when deciding how much land you can afford.
What Will My 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 land 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. In our article about payment structures, learn how different scenarios impact your cost of ownership and cash flow.
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 land loan 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.
Running some scenarios using our affordability calculator is a good way to analyze if you can service
the debt associated with a land purchase. Different combinations of loan terms, commodity types, yields, prices and down payments will help you determine the feasibility of a purchase.
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. If you are also considering renting land, our article on renting vs. buying farmland can help you compare costs using a simple analysis.
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.