Passive Income by Renting Farm Land

farm income, passive farm income, passive income

Do you have any idea how profitable renting out farm land can be? If you’ve ever read about Warren Buffett and his early investments, you know that he purchased land early in 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 suspect that it would be good enough for the Average Joe as well.

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.

Leasing the Property

So the real question in this passive income article is, “How much does farm land lease 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. 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% would equate to $23,800 per year, which is 100% passive.

Future Value of the Property

Property is really a wonderful 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 years. Plus, it’s a nice hedge against inflation. If we kept 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, 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.

Is It Worth It?

As we established earlier, the 60 acre farm would cost $595,000 initially. Property tax and insurance would probably cost 2% of that value each year, which is about $11,900.

Expenses

  • Initial expense: $595,000 (we’re paying cash)
  • Cost per year: $11,900

Income

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 grand total of $41,650, or 7% of our property value.

Sure, it would take us approximately 10 years to recoup our initial investment, but this income is 100% passive and the increase in property value is tax free up to $500,000 (if you are a 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: $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?

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10 thoughts on “Passive Income by Renting Farm Land

    1. Very true, but make a plan for the next 20 years and I bet you could. My wife and I will pay off our house in 3 years. At that point, our house will be worth about $125,000 and we’ll be able to save up another $250,000 or so in the next 7 years with the help of a little interest. Give us another 10 years and we’ll be at a mil for sure. That’s when the real wealth gets started.

  1. I am getting to the point of wanting to make sure that anything I invest in would return some sort of cash flow. If I had $595,000 currently, I would pick up some rental houses or a small apartment building. I bet the numbers would be somewhat similar. However, if the farmland were in the path of development and could pay for itself while waiting for gains, then maybe.

    1. Yep, if the land could cover the cost of taxes and then some, plus appreciate heavily because of its location, then it would be an awesome purchase. That you’ll just have to guage when you find that hunk of property! 🙂

  2. wouldn’t it be better to put down 10% on the 60 acres. Finance the rest at today’s low interest rate. Take the rest of that money to either invest, or buy other properties?
    599,000
    10% down 60k
    finance 540k (payments would be about 3500 with tax and ins)
    540k invested with even a 10% return would give you
    54k/yr
    plus your $23,800
    plus the appreciation of $29,750
    plus tax savings from mortgage interest.
    you would still have a positive cash flow of 34k plus appreciation and tax savings.
    of course this is theory for me, but seems like it may be a to grow your money even more efficiently?

    1. It’s a great point Rick, and it would most likely work, but you can’t deny that this would come at a higher risk to you than if you would pay cash instead, right? What if we no longer had renters for a couple of years and I lost my other income? There would be no way to keep the property and we would ultimately lose our entire investment to the bank. I’d rather play it safe and stick with the cash route. Even if there are no renters, at least we would own the property free and clear and would have an option to sell it or hold onto it for a little while longer without too much pain from the lack of rent money.

      1. good point… not really disagreeing with you, just looking at different angles … you could put the money into a variety of investments from stocks/bonds and real estate. yes it is riskier, but then again, i guess it would depend on your goals. growth vs income … and stress levels you are comfortable with.
        something we have explored, but i know next to nothing about is hardwood farming. there was an American company in Costa Rica that gave some impressive numbers doing hardwood farming. their goal was to have some of the money to buy more rainforest (conservation), and some for income for investors. doing a little looking with this in mind, maybe doing partial hardwood farming on the land?

        1. No problem Rick. I always enjoy comments, positive or negative. They’re all fun. 🙂 Good luck with your search for farm land! That’s got to be kind of exciting – just don’t rush it and you’ll find the perfect plot.

  3. What if you already own 60 acres of land and you want to begin renting it to a farmer. Since it is passive income what will you be taxed on the rental income and how do you report it?

  4. Owning farmland and renting it is the way to go. My father just passed 13mos. ago and when he bought this farm in the middle 70’s paid $600.00/acre today its worth $10,000/acre today. That pretty good can’t get that kind of return anywhere else today. Plan on keeping it there,s 766 tillable acres 988 acres in all. Where else could I sit back and collect extra money doing nothing but owning it. There are 4 other heirs so I’m not getting the whole boat. I do have a question you may be able to help me on though. My mother is still living and she never dealt with the financial part ever in the 68 years they were married and was then in charge of this big estate. She was overwhelmed with all that came with it and my cousins wife started helping her with her personal accounts and bills each month. She has the authority to all the money including the farm account. This fall her son will start renting the farmland to farm. I feel that at this time she should not have the power that she has over the money she has now. What’s your thoughts on this?

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