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When establishing a new farm or expanding your existing agricultural operation, is it better to rent or own your farmland?
About 39% of the 911 million acres of farmland in the contiguous U.S. is rented, according to the latest available data from the USDA.
While livestock producers tend to own their land – rented property represents only 28% of all pastureland – growers are fairly evenly split between renting and owning their farmland. As of 2022, 54% of cropland was rented rather than owned, with a specific concentration on growing cash grains like rice, corn, soybeans, and wheat on that rented acreage. But is one approach better than the other from a financial perspective?
In this blog post, we’ll consider the pros and cons of renting or buying farmland, outline how to calculate whether renting or owning may be the best fit for your operation’s unique financial position, and explain how financing solutions can help put your own farmland within reach.
Save this post for future reference by downloading our free PDF version here.
Renting rather than buying farmland can offer farmers a number of benefits, including:
Upfront Cost Savings: While buying farmland requires a substantial upfront investment, renting land lets you instead utilize more of your readily available capital to purchase inputs, finance equipment, or pay for other critical operational expenses.
Flexibility: Renting land offers you the flexibility to relocate, expand, or downsize as needed. If your operational circumstances change unexpectedly, it’s much more straightforward and relatively inexpensive to end a rental agreement than it is to sell owned property. Renting also gives you the opportunity to expand in a more experimental sense – to try growing a new specialized crop or test out a new agronomic strategy – without necessarily making a long-term commitment.
Good for Beginners: Renting land is a good option for new farmers who are just starting out with their first ag operation. You may be able to connect with an experienced landlord who has deep ag expertise and can serve as a mentor. Renting farmland can also help you get up and running more quickly, since existing infrastructure (like irrigation systems), water rights, and buyer or supplier relationships may already be in place.
Reduced Risk: Because you’re not the owner, you are not responsible for handling major problems that could potentially arise on the property over time, like unexpected maintenance costs, zoning restrictions, property value fluctuations, or other unforeseen issues.
Tax Deduction Opportunities: Farmland rent payments are tax deductible. Additionally, if you use an operating loan to finance your rent, you can also deduct the cost of interest incurred from that loan.
Renting land – rather than purchasing it outright – does have some negative aspects, including:
Limited Control: As a renter, you have less control over the property than an owner would. Making serious changes to the land, building new structures, or making other more substantial modifications to the property would likely require landlord approval (and also may not be smart investments, given your temporary tenure on the property.)
Restricted Long-Term Planning: Because the majority of farm rentals are usually relatively short-term, it can be difficult to invest in long-term projects that would benefit your farming operations. Improving soil health, as an example, is often a long-term undertaking. But if you leave the property after only a few seasons, you could be sacrificing all the hard work you invested in the land without being able to reap the eventual crop health and overall yield benefits.
Potential Rent Increases: Since land values fluctuate over time – and because your landlord can dictate their preferred per acre rental price – you may see your rental costs becoming more expensive during your tenure.
Unexpected Land Unavailability: Your landlord could eventually decide to rent the land to the highest bidder, meaning you could lose out on a land agreement renewal if you can’t match a high rent offer from another farmer. The landlord could also opt to sell the land after a few years rather than renewing your existing rental agreement. If you’re not in a financial position to purchase the property at that time, you’d need to leave the land and restart your operation elsewhere with potentially limited notice.
Potential Conflicts with Landlords: In some cases, landlords may not have agricultural experience and may not understand your unique operational needs. Developing a strong, positive relationship with your landlord and communicating with them regularly can help you stay connected and more likely to be readily informed of any property changes that might be on the horizon.
Buying farmland can offer a number of benefits, including:
Stability: Unlike rental properties, the cost associated with owning your land will not potentially increase over time. While it could potentially increase in value, your monthly land payments will not increase.
Complete Control: When you own your land, you exercise complete control over every aspect of your property. Whether you want to build new structures, change existing components, or make other major changes to the land, you’re free to make any modifications you’d like without having to ask for permission.
Long-term Investment: Any improvements you make to your land will reap rewards for years to come. Plus, as an owner you don’t need to worry about making an investment that can’t travel with you to a new rental property, and you don’t need to worry about any potential pushback from a landlord who may disagree with your ag strategy. Your land will also likely grow in value over time, and you’ll continue to build equity as you continue to pay off any loans on your owned land over time.
Building a Legacy: Owning your land means you can pass it down to future generations, continuing the legacy you’ve built for years to come. You can be proud of what you’ve built and the farm you’ve established with your strategic investments and years of hard work, knowing it will continue to deliver value to your family in the future.
Tax Deduction Opportunities: Farmland property taxes, interest payments incurred on a land loan, interest paid on equipment or operating loans, and any operating expenses intended to improve your farmland are tax deductible.
While buying farmland can be beneficial in some circumstances, it can also lead to:
Major Upfront Capital Expenses: Buying farmland can be quite costly, meaning you’ll need to tie up a lot of capital by making the initial down payment. This limits how much money you have accessible for other essential operational expenses, like inputs or equipment, and reduces how much money you can set aside for long-term savings and retirement funds.
Unforeseen Property Challenges: You may need to deal with unexpected issues such as water resource challenges, zoning limitations, easement disputes, and other unforeseen challenges as a property owner.
Potential Problems with Neighbors: If a potential problem arises with your neighbor – property line disputes, spray drift problems, or other potential issues – you can’t just call in your landlord to handle the situation and come to a resolution, nor can you relocate to a different property.
Unexpected Property Risks: Other risks of owning farmland can include the potential impact of natural disasters, ag market fluctuations, government policy changes, and environmental concerns.
If you've reviewed the considerations above and believe a land purchase is the right next step for your ag operation, the FBN Finance team is here to help you with the next steps in securing a land loan for your farm. Plus, with FBN Finance’s instant approvals, your land loan application could potentially be approved within minutes for land loans up to $2.5 million* if you qualify.
Alternatively, if you’ve decided that a land rental is the best approach for your current financial position, our team can help you learn more about how an operating line can help you cover future rent payments in addition to input expenses, labor costs, equipment payments, and more. FBN Finance offers farm operating lines for farmers at amounts ranging between $100,000 to $5,000,000.
With an average of 15+ years' experience each in ag finance, FBN Finance loan advisors are highly experienced and deeply familiar with the unique challenges of the ag industry. Our team is ready to talk you through all facets of the financing process and will make sure you get the solution that best fits your needs.
Click here or call us directly at 866-551-3950 to speak with a loan advisor today.
*Subject to final review and verification and underwriting.
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Terms and conditions apply. Land financing offered by FBN Finance, LLC, provided in connection with our underwriting partners, and is available only where FBN Finance, LLC is licensed. To qualify, a borrower must be a member of Farmer’s Business Network, Inc., and meet the underwriting requirements of FBN Finance, LLC and its lending partners. All credit is subject to approval and underwriting. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify. NMLS ID: 1631119.