How to Buy Farm Land As a Beginning Farmer

FBN Network

Apr 01, 2024

One of the main challenges farmers face is securing farmland. However, there are financial products and resources that can help make purchasing farmland more accessible for farmers who are just starting out. 

In this post, we’ll cover:

Renting vs. Buying Farmland: Pros and Cons

An easy and capital-efficient way to start an ag operation is by renting farmland. Renting allows farmers to build a land base and cash flows to ensure they can make payments for equipment

However, renting doesn’t allow you to build equity and value over time. Rents can increase or be terminated, making renting a potentially riskier proposition over the long term.

Buying farmland can offer more stability and financial security, but it is very capital intensive. It can take multiple years to save up just for the down payment, and land markets can be very competitive. Securing funding can help make owning farmland more accessible.

Get more insights in our blog post “Rent vs. Buy Farm Land: Which Is Right for You?

Farm Land As a Future Investment

Purchasing farmland is both a financial and a personal decision. There are many reasons why farmers may decide to purchase farmland to invest in their future.

“Farmland investments are typically held for the long term, as they are considered assets that appreciate over time,” says David Whitaker in Successful Farming. “While there may be good years with great short-term returns, farmland investment is primarily a hold asset for the future.” 

As commodity prices increase, owning property helps protect against inflation. Not only does farmland often hold its value in the long run, a working farm produces goods that can be sold for profit in the short-term. 

Investing in farmland is also about investing in America’s food security. About 0.2% of U.S. agricultural land a year is lost due to development. That may not sound like a lot at first, but that’s around 1.8 million acres lost per year since 2015. 

Furthermore, as land gets swallowed up by developments, agricultural land is becoming more difficult to find. Purchasing farmland sooner rather than later can help position you to find the quality of land that meets the unique needs of your operation, whether that means a certain wetness index, soil type, or elevation.

Try FBN’s farmland evaluation tool AcreVision to determine if a piece of farmland is the right fit for your ag operation.

Purchasing farmland can also provide for the next generation. It can teach children valuable skills and stay in the family for years to come. In fact, at least 80% of farmers desire for the next generation to take over their farms. 

FSA Beginning Farmer Loans: Pros vs. Cons

FSA Beginning Farmer Loans are a great way for eligible farmers to get started. They can cover up to 95% of the land purchase. 

Furthermore, the interest rates on these loans are very compelling. This might make them the right option for those who can qualify.

However, they have some limitations: 

  • FSA will finance 45% up to a maximum loan amount of $300,150. The balance of the debt may be financed by a commercial lender, private lender, or the seller.

  • The current land owned by the applicant must be less than 30% the size of the average farm in the county. For example, it must be less than 107 acres in Cedar County, Iowa. 

  • The farmer must have operated a farm or ranch for between 3 and 10 years.

  • The farmer meets FSA requirements

FSA Direct Farm Ownership Joint Financing Loans: Pros vs. Cons

FSA Direct Farm Ownership Joint Financing Loans are likely the next best option for those who qualify. They can cover up to 100% of the farm amount with very compelling interest rates

However, they also have some limitations:

  • FSA can lend up to 50% of the cost or value of the property being purchased. A commercial lender or the seller provides the balance of loan funds.

  • Maximum FSA loan amount of $600,000.

  • Another lender would provide the remaining financing.

After farmers max out their FSA loan amount, their next best option is typically seller financing or going to a commercial lender. 

Overwhelmed with options or not quite sure where to start? Speak with an FBN advisor directly by calling 866-619-3080 or clicking here to get more information.

Seller Financing: Pros vs. Cons

Seller financing, usually structured as a contract for deed, is when a farmer acquires a property with financing provided by the seller of that property, using the property as collateral.

The amount of the property being financed, the term, and the interest rate are agreed upon between the seller and the buyer. Depending on the terms negotiated, seller financing can be an attractive option for many beginning farmers. 

However, because seller financing is oftentimes the last remaining option for buyers who are pivoting away from traditional loans, the seller may not offer the best financial deal. For example, the interest rate may be higher with seller financing.  

Commercial Lenders and Banks: Pros vs. Cons

Commercial lenders and banks are another option. FBN Finance land loans is an example.

They typically lend up to 65% of the property value and up to 50% of the total assets of the farmer. To qualify for these loans, the farmer must be able to demonstrate that their farming income will be sufficient to cover all expenses and debt payments, plus a buffer of typically 25%.

For farmers in expansion mode, the main limiting factors are typically being able to cover the down payment — which amounts to 35% or more of the farm value — and being able to generate cash flow to cover the loan payments. 

FSA Guaranteed Loans: Pros vs. Cons

FSA Guaranteed Farm Loans are loans issued by commercial lenders — including FBN — that get a guarantee from FSA, allowing them to provide loans to farmers with tighter financial metrics.

They are a good option for farmers who want to buy additional land and are not eligible for a conventional loan.

However, related costs may be higher. These FSA Guaranteed Farm Loans have a maximum loan amount of $2,236,000, typically higher interest rates than conventional loans, and an additional upfront cost of about 1.5% for the guarantee fee. 

A Farmers First® Alternative: Farmland Capital

A more recent alternative in the market is FBN Finance’s Farmland Capital. Farmland Capital is a way to level the playing field in the ever-consolidating world of agriculture, allowing farmers to compete with institutional investors and hedge funds for land and keeping U.S. farmland farmer-owned and controlled. 

Watch the video below to learn more Farmland Capital or continue reading below.

How FBN Finance’s Farmland Capital Works

Partnering with Farmland Capital makes buying land less capital intensive, which means farmers can buy more land earlier. Farmers can take a loan of up to 65% of bare land value (down payment of 35%) and then cover 49% of that down payment with Farmland Capital.

This means that farmers can buy land with as little as 17.85% down payment. 

Additionally, farmers do not have to pay any interest on the Farmland Capital investment, providing more flexibility with their cash flows to make necessary investments in their business and to weather the ups and downs inherent to farming.

Get Access to Capital Now for a Share of the Farm’s Future Change in Value

Farmland Capital is perhaps comparable to a farmer getting support from or partnering with a relative. These arrangements can vary, but typically both the farmer and the relative participate in the income and the change in value of the farm — up or down.

But let's face it, there are a lot of farmers out there who don’t have a rich relative that wants to purchase land with them. 

FBN Finance’s Farmland Capital aims to connect farmers looking to expand their operation with investors interested in having money invested in farmland and the protection farmland assets can give them in the face of volatile investments in other markets. These investors value investing alongside good farmers who are aligned on farm value preservation and have majority direct ownership.

Who Owns the Property and Makes the Decisions?

With FBN's Farmland Capital, the farmer is the owner of the property, and Farmland Capital is not on the deed. The farmer gets 100% of the income while Farmland Capital gets 0%, giving the farmer more flexibility with cash flows.

The farmer makes all decisions and pays for all operating expenses, including property taxes, mortgage, and insurance. 

What Happens If the Farm Loses Value?

If the farm loses value, Farmland Capital shares in that loss in value. Farmland Capital shares in a portion of the appreciation or depreciation of the farm between when the land is bought and when the farmer buys out the contract. 

Farmland Capital is junior to the mortgage loan, so Farmland Capital can lose all its investment before the lender loses anything. In fact, typically the co-investment loses all its value even before the farmer. 

When Can Farmers Buy Out the Co-Investment?

The goal of this program is for the farmer to buy out the co-investment at a future date. The agreement is for up to 10 years, and the farmer can buy out the co-investment at any time based on the appraised value of the property. 

The contract is structured so that a farmer can likely buy out the investment within 3–9 years with the equity they have built via:

  • Land appreciation

  • Equity built through land loan payments

  • Savings generated from farm income

Farmland Capital gives growing farmers a path to ownership while maintaining full control of the land and their destiny. 

Scale Your Operations with FBN's Farmland Capital

Click here or reach one of our advisors directly by calling 866-619-3080 to learn more about how FBN's Farmland Capital can help grow your operation.

Access Farmland Capital

Related Resources

© 2014 - 2024 Farmer's Business Network, Inc. All rights reserved. The sprout logo, "Farmers Business Network", "FBN", and "Farmers First" are registered trademarks or service marks of Farmer's Business Network, Inc. Terms and conditions apply. Financing and investments managed by FBN Finance, LLC in connection with its financing partners. All financing and investments are subject to underwriting; not all applicants will be approved.

Financing offered by FBN Finance, LLC and its lending partners. Available where FBN Finance, LLC is licensed. Terms and conditions apply. To qualify, a borrower must be a member of Farmer’s Business Network, Inc. and meet all underwriting requirements. Interest rates and fees will vary depending on your individual situation. Not all applicants will qualify. NMLS ID: 1631119.

FBN Network

Apr 01, 2024

Start your loan process now

Fill out the form below to contact an advisor or call us directly.