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Calculating your cash rent equivalent (CRE) can help you determine whether it’s the right time for you to make a farmland purchase by helping to compare the cost of land ownership to the cost of renting.
Trying to decide whether buying or renting farmland is the right fit for your farm? Check out Renting vs. Buying Farmland: Which Is Right for You?, a free educational guide from FBN Finance.
Your CRE is the total of your land loan payments (both principal and interest) plus your real estate taxes, divided across your total acreage.
If your calculated CRE is notably higher than local farmland rental rates, it likely means that renting land is the right move for your operation.
On the other hand, if your CRE is substantially lower than local farmland rental rates, it may make more financial sense to purchase local land for an operational expansion rather than renting.
It’s important to note that your CRE only includes your owned acres and how much it costs you to own them annually. It does not include additional operating expenses like inputs or labor, land improvement costs, rental costs for any additional land you may operate, or personal/family financial obligations. Make sure to also consider these critical factors before making a land purchase or rental decision.
To calculate your CRE, use the following equation:
Let’s walk through an example land ownership scenario and the associated CRE calculation.
Farmer Smith currently owns 500 total acres.
400 of those acres have been in the family for multiple generations and have already been fully paid off.
Real estate taxes on this acreage are $8,000 per year.
100 of those acres were purchased separately, with payments totaling $30,000 per year.
Real estate taxes on this acreage are $2,000 per year.
Currently, Farmer Smith’s cost to own his farmland is $40,000 per year. When divided across his total 500 acres, his cash rent equivalent (CRE) comes out to $80 per acre.
Now, let’s consider Farmer Smith’s CRE if he were to buy newly available farmland that has just been listed on the market next to his current operation.
He calculates his annual payment for this land would be $37,000 per year, plus another $2,000 in real estate taxes, bringing his total annual payment for the new land to $39,000.
This new total, divided over the full 600 acres he would own if he were to purchase this additional property, yields him a CRE of $131.66 per acre.
If Farmer Smith were considering buying vs. renting additional land to expand his operation, he could use this CRE value to determine which approach would be the more fiscally responsible move.
In this case, if local rental prices were higher than $131.66/acre, it may make the most sense for Farmer Smith to purchase additional land rather than renting. However, if local rental prices were lower than $131.66/acre, it would likely be a better idea to rent land as part of an expansion plan.
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 pre-qualification, you can gain peace of mind that you're approved for financing before making an offer on an ideal piece of property to expand your operation.
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 $1,000,000.
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.
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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.