5 Factors to Consider When Timing a Farmland Purchase

Owning farmland can be a great investment, both as an appreciating asset and passive income source. But when is the best time to buy?

 We’ll walk through some key risk-reward factors that can aid in your farmland purchase timing. That way, you can be sure that you’re making a profitable investment. 

Is purchasing farmland worth it?

Before we get into timing your purchase, we should walk through: why is farmland a good investment in the first place? 

As an asset class, farmland offers many benefits that make it pretty lucrative. If you’re wondering how owning farmland can benefit you, let’s walk through some of the key benefits you’ll receive from owning farmland. 

Asset appreciation

Like most real estate, farmland has great potential for long-term appreciation. As the population continues to grow and the demand for food and other agricultural commodities increases, the value of farmland is expected to rise. 

For farmland owners, this can provide a great opportunity for capital gains and a strong return on investment. Owning farmland can also provide a sense of security and stability in uncertain economic times, particularly for landowners nearing retirement. 

Passive income

Another advantage of buying farmland is the consistent passive income it generates. If you lease your land to a farmer tenant, you get to sit back and collect rent on an annual basis. 

Given the uncertain economic times we’re facing, this is a great way to ensure consistent and reliable income to supplement your other assets. If you have a farmer who knows what they’re doing, this can require minimal input on your part. In other words, it’s a source of passive income. 

Inflation hedge

Although you likely have other reliable investments in your portfolio, inflation is throwing a wrench in many people’s well-laid wealth management plans. Farmland can help provide a natural hedge against inflation, as the value of farmland has a strong 70% correlation with the CPI.

Higher crop prices result in higher payments to investors, and also increase the value of the underlying land. This makes it a great way to protect your investment in uncertain economic times.

Operational diversification

If you already have a farmland operation, picking up new ground gives you the option to mix things up through diversification. That means you can try growing different crops, raising some animals, or even using the land for recreational or residential purposes.

Diversifying operations can help mitigate the risks associated with crop price volatility and weather-related risks. For example, if a drought affects one crop, another crop grown on the land may not be affected, reducing the overall impact on the profitability of the land.

5 factors to consider when timing a farmland purchase

When it comes to purchasing farmland, timing is critical. Making an informed buying decision at the right time can help you mitigate some of the risks involved. 

Despite its advantages as an asset class, farmland is still an investment. And like most investments, nothing is guaranteed. There are risks involved—some of them, like weather, are beyond your control.

As such, it’s important to do your research and consider whether now is the right time to make a farmland purchase. Time it right, and you can maximize your chances at profitability.

Here are five key factors you should keep in mind. 

1. Personal circumstances

The first thing to consider is your current personal financial capabilities and limitations. If you aren’t prepared not only to purchase the land, but invest in its operation and upkeep, then it could drag down your investment portfolio. 

2. Market & economic conditions

Many of the factors that impact farmland purchase timing are external. That’s why it’s critical to consider  current market and economic conditions. These include:

• Interest rates. Low-interest rates can provide more opportunities for returns on investment, while high-interest rates can make it difficult to sell land at current prices in the future.

• Inflation rates. Inflation impacts the costs of commodities, which trickles down to impact the value of farmland. 

• Global events. These can greatly affect the demand and supply of agricultural products, and in turn, the prices of farmland.

Buying when market conditions are favorable can provide a better return on investment. But this requires you to do your homework to know that those conditions are in the first place. 

3. Crop price volatility

Ultimately, farmland’s value is tied to its ability to produce crops. Crop prices can give you an idea of how quickly you can expect a return on your investment. 

The prices of agricultural products can fluctuate greatly due to a variety of factors such as weather, global demand, and more. As such, make sure you’re keeping a close eye on commodity markets to ensure you don’t make a major investment right before a major downturn.

4. Weather-related risks 

Droughts, floods, and other natural disasters can greatly affect crop yields and ultimately the profitability of the land. Buying during a period of favorable weather conditions can provide a better return on investment. However, buying during a period of unfavorable weather conditions can lead to financial losses.

5. Terms of sale

The timing of a farmland purchase isn’t limited to external factors. There are some internal variables, usually included in the terms of sale, that could affect your ability to make the purchase and realize the investment.

It's also important to consider the legal aspects of land ownership and any other agreements associated with the land, such as easements, mineral rights, and zoning regulations.

When is the best time to purchase farmland?

Farmland is a high-demand investment, due to its reliability as an asset class and potential source of passive income. But the truth is, there’s no set time that’s best to buy. 

It depends on the land, your plans to realize the value of your investment, and your own financial situation. What’s more, there are lots of external factors you need to take into account before making a purchase. 

Here are some key questions to ask: 

• Is it financially viable for our operation to consider buying land at current prices?

• Are land prices in a bubble, and is the market currently at or near its peak?

• Will potential interest rate increases make it difficult to sell land at current prices in the future?

• Are current land prices able to generate enough income unless crop prices significantly increase?

• What is the long-term potential for cash rent, for investors considering buying farmland?

Keep in mind that the market and economy are always changing, so it's a good idea to stay on top of the latest info and have a solid plan in place to handle risks as they arise.  

While there may be some risks to consider, long-term appreciation may make farmland a worthwhile investment to consider. Having a solid plan for managing the risks associated with owning farmland is key to the success of your investment. With the right approach, owning farmland can be a profitable and rewarding investment for landowners.

Considering buying a piece of land and want to know its cash rental value? Use our CashRentstimate tool to figure out how quickly you can realize a return on your investment.