Wednesday, November 2, 2011
Buying Your First Farm
How many of you own your own farm? That would be an interesting statistic of my readership. One of you emailed that you want to own a farm and another emailed saying you bought one!
I wanted to own farm land since I was a child. We were tenant farmers so ownership seemed a long ways away. It was for me, Age 54 before we bought our first real farm! I can tell you the feeling of ownership is priceless compared from looking at the outside in.
A farm has been described as anything from an acre to 25 acres in some states. Most governments consider a tract of 10 acres or more as large enough to meet CAUV, or Current Agricultural Use Valuation, or $2500 or more farm income per year.
To me, 50 acres is a farm. 100 is larger, 200 acres is large enough for some diversity between fields and crops and livestock. Everyone has their own opinion.
Once you have decided you want to own a farm, how do you do it? Of course it takes money so $50,000 saved may not be enough to get you started. Our bank and many banks require 50% cash on bare land so 100 acres at $5,000 an acre would require $250,00 in cash or assets the bank can take a lien on for the loan.
Then figure your payment-$250,000 at 5% interest for example, on a fixed 30 years lowan is a lot of money. Taxes and insurance adds some cost but are negligible to me compared to the payment. I have to pay the payment first and I have to pay the real estate taxes second.
To be more exact, if I borrow $250,000 at 5% interest amortized over 30 years, annual payments would be around $16922 principle and interest. Total interest paid over the life time of the loan would be $238,770 or $7959 average per year. Total principal paid would be $250,000 or $8333 average per year.(Thanks, RS)
You probably can't rent that ground for $40,000 acre a year in my example but you can rent it for half that amount. If you are old or young, the payment is doable in today's economics. The difference in my situation is the cost of ownership, investing in something that is going to retain its value or increase over time. It is a good business decision for me today but remember that a five percent margin of profit is traditional in agriculture. "They aren't making any more of it" but you don't want to buy in a bubble, either.
I don't think we are in a permanent bubble where prices will stay deflated for a long period of time but I don't know either. Land was "cheap" when I started in 1971 but few had money to buy. The numbers have changed but the situation hasn't. Not that many people have the money or inclination to invest in land now but enough do that we have seen record high farmland prices in Illinois and Iowa, the two prime farmland states.
We have friends who have first right of refusal on 160 acres at $9100 per acre. It is prime farm ground, some of the best in the world and rents are as high as $400 per acre in that area. Because they are lifelong farmers and have little debt, they can borrow the needed funds at less than 4% interest. They will probably never get this chance to buy land adjacent to theirs. Thankfully, farmland is not quite that high in Ohio.
The main thing is to do your homework and build a network of people you trust. That includes your banker, a real estate agent, perhaps a consultant like myself who can help you sort out the right property for you.
Finding that property is the challenging but exciting part for me. We looked hard for two years before we bought this farm and now it is our home. Location, buildings and soil were important to us and we found the right combination for us. Great location, good soil and good buildings that needed some repair.
I am very excited for our two readers and it brings back the good memories of the past seven years here in Martinsville.
Comments and email are appreciated as we all work to help each other in our common interest, the farm.
I am thankful I am where I am but wish I could have started a little sooner like our two readers. I will be sharing more about our experiences over the coming days.