Timber Lake Topic, Feb 19, 2020
Read the full article from the February 19, 2020 issue of the Timber Lake Topic here, or log onto their website at the link below.
https://www.timberlakesouthdakota.com
Is land a good investment? What are investors looking for and how do I know if my land would be an attractive investment if I decide to sell? How does an investor determine the rate of return on their land purchase? These are all questions that I get asked quite frequently. If you are thinking of selling your land, it can be helpful to put yourself in the buyer’s shoes so that you have an idea what they will be looking for.
Most land buyers are going to be evaluating the annual rate of return of their purchase. In its simplest form, the rate of return is calculated by dividing the income by the cost of the land. There are additional factors that could be included such as taxes and maintenance for things like fencing, wells or water lines. We’ll just take a simple example to demonstrate. Say you pay $200,000 for a quarter of land and you expect to get $50/acre in rent. First, calculate your income: $50/acre rent * 160 acres = $8000 income. Then divide that by the purchase price. $8000 / $200,000 = 4% return on investment. Is that a good return? It depends on the investor’s goals and what their alternate investment opportunities may be.
Before we go further, it might be good to define what an investor looks like. For many people, when you think of an investor you might envision someone who lives in a larger metropolitan area who has a high paying corporate job or who has built a business that has done well and has excess income to invest in something that will provide a stable, positive return. They may be looking at Ag land as a means to diversify their investment portfolio. These people certainly do exist. But there are other types of investors who are just as viable candidates for land. Many investors are farmers and ranchers themselves who have made good business decisions over the years and conserved their income. Sometimes they are retired or sometimes they are actively operating. These investors know land and how stable an investment it can be over time. They often have a prospective renter in mind already when purchasing the land. The face of an investor can vary and may surprise you at times. The key to remember is that most people who have the ability to make a land investment purchase may have been frugal in spending and diligent in researching investment opportunities. Don’t expect a knight on a white horse willing to pay top dollar just because they can.
So back to the rate of return. What is an attractive rate for most investors? Ideally, many folks will be looking for something in the neighborhood of 4% to 5%+. Are there many land properties on the market today that offer that kind of return? No, there aren’t. Not saying that you won’t find any, but you will look at a lot of places before you find one. But it also depends on the investor and their goals. Some are okay with a 3-4% return if they can get it bought right and factor in the appreciation of the land value over time. If they are looking at it with a longer-term perspective, then they might be willing to consider a lower annual return. It also depends on what other investment options are available and what kind of returns those other options are providing. If they are looking at cd rates at a bank at 2%, then land at 3.5% to 5% may be an attractive investment, especially if land is their investment vehicle of choice.
The current land market is still strong in terms of land values. We are down slightly from the peak in 2013/2014, but still well above values from twelve to fifteen years ago. Investors are watching; some are participating if the right profile of property comes available in the geography where they want to be. Give me a call if you’re looking to buy or sell Ag land and let’s see if we can find a match for you.
