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?