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fernwood
Frequent Contributor

Talk me out of buying a little more land

Had my eye on a small tract of land near me for a couple of years.  Thinking about purchasing it.  With the cash I have to pay down the land will make its payment.  Right now with Farm Credit I can lock in 20 yr loan @ 6.15% interest.  The cash I will be using for a downpayment is sitting there making very little.  The loan will be small in relation to our total assets.  .  

 

To make a long story short I would rather have land than cash sitting in the bank.   Can someone look in their crystal ball and tell me why this would be a bad thing to do?         

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10 Replies
kraft-t
Senior Advisor

Re: Talk me out of buying a little more land

You are right that returns from bank deposits are pretty dismal these days. I would rather bury it in a cream can than let those bankers have it for 1%.

 

Of course there are things to consider and we cannot advise based on our limited information. How much is the land worth and how productive is it. Purely from a money stand point, i would be inclined to support the purchase. Chances are earnings from  other assets will help you retire the new debt. But then you may be comfortable carrying the debt to maturity.

 

For one thing, good farm land is getting a bit pricey these days, but if your consider it a long term investment that will generate revenues for the next generation, then it doesn't matter if you pay too much in the short term. One day t will be worth more than today but it may take a while.

 

I bought one about 4 years ago @ $5K per acre and paid it off a couple of weeks ago. Paid off land cash flows pretty good if you average the purchase prices. $900 land  brings the average of $5000 land down to a reasonable level. Like maybe $2000 per acre average. $2000 land cash flows nicely with $5 corn and $10 beans.

 

Think of it as a rich man buying that fancy mercedes. It costs a bunch and it probably isn't the greatest investment, but some times you do something just because you want to whether it is a sound investment or not. That is what living is really about is doing the things you want to do. That s a good enough reason right there. Because you want to buy it. Your doing the buying and you are doing the paying and it will probably beneft your kids and grand kids. Why not do it?

 

If it was going to stress you or cramp your life style, then I might look at it differently.

 

Good luck!

 

 

 

 

 

 

 

 

 

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fernwood
Frequent Contributor

Re: Talk me out of buying a little more land

Dang it kraft-t, and I hope this does not offend you, we look at this issue just alike.  I'll give you all a little more info. 

 

Productivity wise it is average for the area I live in.  Good location as the land would have been in houses a few years ago but the economic downturn has thrown cold water on that.  The whole farm is for sale split up into tracts.  I could wait it out, hope for an economic downturn in the farm economy, and maybe buy it cheaper.  Then again, I could die tomorrow.  My thought were to buy about 1/2 of it now and, if things continue to go well, buy the rest of it down the road.  Kind of conservative coming from me as I used to would have just borrowed enough money to buy the whole thing.  

 

The fact is buying a little land along is one of the few things that I really enjoy anymore.  That has been one constant in my life.  It has nothing to do with adding more land to the ownership total.  Another reason for wanting to buy it is to keep it in farmland vs growing houses down the road.  Would not be the first land  I have bought with that being one of the reasons.  

 

Can anyone out there tell me why cash would be better?  Guess I look at it as cash as a piece of paper worth something because people believe it is, and nothing else.  I just feel land is safer than cash.  

 

Anyone wanting to differ with me on all this go right ahead.  I am a big boy and will not take it personally.       

 

    

 

  

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nwobcw
Advisor

Re: Talk me out of buying a little more land

   From the info you supplied it seems like it won't hurt you.  You stated it would have been developement land a few years ago.  If so, it will again someday.  The only question I have is if you will be paying above farm value for it and how much more.   Buy it from you've said and don't look back.

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cropdoc5
Veteran Contributor

Re: Talk me out of buying a little more land

Depending on what you are hoping to gain, you might consider buy buying silver.  Way under priced compared to gold currently and could gain in value a lot in the next few years.   With the goverment deficits, precious metals are a safe haven and have given returns similar to land over the last 10 years.  Problem with land is it is tied to cash flow, and if the markets fall, land will get cheaper again.   If capital gains are not your objective then buy the land and keep yourself financially sound as this bubble we are in may come to an end.  One good crop of corn and beans and the market comes back to reality with 3 dollar corn and 7-8 dollar beans, party over.

 

Cropdoc

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Kay/NC
Advisor

Re: Talk me out of buying a little more land

I would not buy it with development potential factored into my decision.  Rural property that made sense to break into house lots even 2-3 years ago becomes more and more marginal for that purpose every day. 

The single factor of gasoline prices shortens the resonable commuting distance to towns and cities.  Strung-out development of land that was targeted for sprawl not all that long ago is simply not feasible for a family to live on and work elsewhere today.  With gasoline predicted to be at four dollars this summer, and five by next, that distance will predictably draw in upon itself. 

I have recently bought or bought into a couple of tiny tracts, just because I was tired of seeing who hung out on them.  Like you, I figured the money in the bank was not earning anything, and I'd kick myself if I let the chance to clean up the neighborhood mix pass me by, after 16 years of watching drug deals and other highly questionable behavior go on in plain sight. 

I do have concerns about farmers making land buys predicated on present prices for crops.  Cycles of boom and bust, ebb and flow, are part and parcel of agriculture.  If you could manage the buy at the prices you had five years ago, and still not feel stressed, then maybe you will feel as good about it five years from now. 

The only other issue is time left in life to earn it back...and I think you said you are sixty.  A 20-year note makes you work this one off until age eighty, right?  Might be okay if you want to do it, but sort of sucks if you have to....

There is some virtue in having greater liquidity later on in life.  What happens if corn goes back to $2 and beans to five?  Who would buy you out for what you will have in it then? 

Not naysaying, but I'd really have to have a very compelling reason to tie myself to a 20-year note now. 

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kraft-t
Senior Advisor

Re: Talk me out of buying a little more land

From our limited information, I would bet he will cash flow whether corn is $2 or $5. That is why I keep saying that the land need not cash flow but the buyer does have to cash flow.

 

If we are concrened about his age, he has to put his money somewhere. If he is going to continue his saving habit, it just as well be saved in the farm mortgage.

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adfrom in
Contributor

Re: Talk me out of buying a little more land

Check out this good Purdue study on farmland values. 

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centralillinois
Contributor

purdue study/good post

Land that might someday be in houses could be a bargain.  At some point housing will come back as the population increases.  How soon that will be is anyone's guess but in the meantime farming is profitable.  A good rule of thumb ten years ago is that you shouldn't pay more than 10 per cent of your gross income in interest.  Since interest rates have come down that measure may be outdated but still at your age going beyond that might be unnecessarily risky. 

 

The current government policy of creating as much money as possible will eventually prove inflationary.  Maybe they think paying back China in cheaper dollars is the smart thing to do.  The Purdue study is good reading but they forgot one thing.

The vast majority of land buyers would've been greatly impacted if the estate tax exemption had not been increased to $5 million per person.  The wealthiest 1% will increase their land holdings knowing that there's no reason to save cash to pay inheritance taxes upon their death.

 

Demand for land will continue as long as the wealthiest will continue to prosper from less of a tax burden.  Buy it. 

 

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kraft-t
Senior Advisor

Re: Talk me out of buying a little more land

You do know that you may damage your reputation by agreeing with me?

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