SW
Yes, land prices are at all time highs and interest rates are double where they were 18 months ago. Land is still a good investment and not every situation is the same. I bought ground this year because I felt the numbers worked for my plan:
Annualized ROI: After the purchase I spent around $15k cash to improve my first farm. By selling that farm and reinvesting immediately, I was able to get that cash back sooner for a better annual Return On Investment.
Rule of 72: If land prices increase by 8% on average, it will take me 9 years to double my equity. (72/8=9). I would rather double the value of a $1M investment than a $300k investment over the next 9 years.
Debt pay-down: Cash flow is reduced with the new purchase, but this is offset by larger debt pay-down each year. The change in equity on my balance sheet year over year stays consistent.
Cash-on-cash return: I bought my first farm in 2020 before the run-up in land prices. I got all my initial down payment back, moved into a larger investment, and pocketed some returns after financing was in place on the new ground. It would have taken another 5 years to get that return from the old cash flow.
Cash buffer: By pulling out cash with the transaction, I created working capital to reduce risk with the larger property. This improved my short–term risk bearing ability even though there is more debt to service.
Interest rates: Even with an interest rate 2.50% higher than my previous land note, I was still able to invest early enough in the year to get a historically low interest rate by beating the market higher. (Know the market, I expect interest rates will continue to rise over the next 12 months.)
Quality of ground: Although improvements were made to my old farm, the new property has fewer headaches and is easier to maneuver with the large equipment of today.
Have a great week!
Grant Wiese