Passive Income by Renting Farm Land
Do you have any idea how profitable renting out farmland can be? If you’ve ever read about Warren Buffett and his early investments, you will know that he purchased land at the beginning of his life to rent to the local farmers. It was one of his first passive income investments! If it’s good enough for Warren Buffett, I can assure you that it would be good enough for the Average Joe as well.
A Lasting Investment
Unlike the technology, land does not become obsolete and outdated. In fact, quite the opposite happens because buying farm land is like unwittingly investing in your future as it appreciates over time. While other investments may come and go a tract of land is a property that stays with you for as long as you want it. Many families also benefit from having land in their possession as it could be kept and handed down through generations. And unlike stock options and money market investments, the use of land may be enjoyed even without waiting for interests to grow.
Purchasing the Property
In my area, property is pretty cheap. Farmland can be found for about $10,000/acre. In fact, just by perusing Craigslist, I was able to find a property with a house and 60 acres for a listing price of $595,000.And you can also follow the same step and get your own farm land.
A keen mind can easily spot and assess locations that could yield huge amount of potential in terms of development and property appreciation. Owning a rural acreage next to a financial boom can prove favorable to your investment. Remember that you are purchasing land at a certain rates and any improvement near or where your property is situated further increases the benefits that you can derive from your property. Moreover, as population in nearby towns increases, more needs for supplies, products and other essentials are created. Your property can very well take advantage of the market that these needs continuously create. Investing in farm foreclosures can make all these possible for you.
Leasing the Property
So the real question in this passive income article is, “How much can farmland can be leased out for?” According to Jim Ochterski of Cornell University, a property owner can charge approximately 4% of the land’s value to the local farmers that are interested in using your farmland. This percentage is meant to cover the property tax as well as the insurance needed for the property, plus a little extra for a profit.
For our 60 acre farm, 4% interest would equate to $23,800 per year, which is 100% passive.
Future Value of the Property
Property like a land is a beautiful thing to own. If the real estate market is up, or if the city is expanding into your area, your property value could severely increase over the years. Plus, it’s an excellent hedge against inflation. If we keep our money in a savings account yielding practically no interest, our purchasing power would go down as the price of food and clothing went up. However, by owning property like farm land, our purchasing power remains the same (at least) since the value of the land increases along with the rise in the cost of the essentials materials or goods.
Is It Worth It?
- Initial cost: $595,000 (we’re paying cash)
- Cost per year: $11,900
For just renting out the property, we’d receive 4% of the value, which is $23,800. But, we should also take into account the average increase in property value, which is about 5% or $29,750.
- Rental Income: $23,800
- Property Value Increase: $29,750
For the first year, we’d earn $53,550, minus the expense of $11,900, leaving us with a total of $41,650, or 7% of our property value.
Sure, it would take us approximately ten years to recoup our initial investment, but this income is 100% passive, and the growth in property value is tax-free up to $500,000 (if you are married)! Now your income each year feels more like 10%!
My question is, “What if I held onto this property and rented it out for 30 years?” How much would that 7% increase be worth to me? The answer is: 4.2 million dollars! I think it’s about time for me to save up some money to buy land!
What do you think about this plan? Would you ever look into buying land to lease to your local farmer? Please share your thoughts with us below in the comment box.