I received an email recently from an investor that was “looking for land that will cash flow”. My initial thought… at these price levels, good luck with that! My actual response was more subdued – well, you might find something but it depends on what you mean by cash flow. For example, if you want to buy an unimproved parcel with no money down and hope that it generates enough cash to pay the taxes, principal, and interest over time then you may be looking for a quite a while. However, if you have a sizeable down payment then the answer may very well be yes.
Mike Walston, editor of Pro Farmer newsletter, recently wrote an article that was published on agweb.com (Decide if Land Will Pay) that looked at this very issue. He cites a study by Terry Kasten, an agricultural economist at Kansas State University, where a comparison was made of land purchases that involved varying amounts of debt. With any analysis, certain assumptions need to be made about the future. Perhaps the most important one in this case would be… will rents continue to increase in the future while mortgage payments remain the same or go down (thus improving the annual cash flow), or is there so much uncertainty that I don’t feel comfortable with the risk.
I always find it interesting to see how people look at the farmland investment. I remember 20 years ago when prime land was under $2000 per acre and some potential buyers thought it was just too expensive – “it won’t cash flow.” I wonder if these same people are second guessing themselves now.
