Purchasing land is no doubt a big decision for many. It can be confusing and complicated with a variety of factors to consider. One such factor is the return on investment (ROI) a property has to offer.
If owning a property with income potential is important to you, ROI will play a major role in deciding if a given property is the right fit for you and your goals. The first step evaluating a property’s ROI is to understand what to expect in your market. What is a good ROI?
In Missouri, the market average at the moment is in the neighborhood of 3.5 – 4.0 percent on an annual basis. Once upon a time when corn prices were at all-time highs it was not uncommon to see returns in the 5.5 – 6.0 percent range. Now, a buyer has to really find a bargain on quality tillable ground to come close to that mark.
Next, you need to calculate the potential ROI for the prospective property. This is done by totaling your income opportunities and diving by the sale price of the tract. For example, if you can produce $5,000 in income on a property which cost $100,000 the ROI would be 5 percent.
What goes into determining potential income? Each property is different and will likely offer different opportunities, however here are a few common revenue streams to consider…
Cash Rent – one of the more popular income streams in the midwest is tillable income. At the moment you can find farmers who pay between $110 – $220 per acre for the farming rights to the property. In some cases you will see higher rates advertised, but be careful and look the fine print in the terms of the contract. At times a higher cash rent price is offered for a short period of time only to drop to a much lower rate in year two, making the ROI significantly less. It will pay to do your homework.
Conservation Programs – many properties will qualify to enroll in any number of conservation programs, which provide annual income for adhering to certain conservation minded guidelines. This can be a great opportunity for select areas of a property and can provide from a few hundred to a few thousand dollars in your pocket.
Hunting Lease – if a property is a pure investment you may consider leasing the hunting rights to area hunters. Depending on location and the type of property you can lease ground form $10 per acre to $40 per acre (waterfowl properties can offer much more). This is a great source of income for those who don’t have the desire to hunt a given property.
Timber – cutting timber can also improve your ROI, however this needs to be done strategically or you will drastically decrease the value of the raw ground. When done correctly this is a nice addition… when done without a plan it is a disaster.
At the end of the day, your ROI is important and should be considered when you evaluate each property you buy. Even recreational ground has income benefits that need to be considered so that you make the best decision possible.
If you have questions or need advice on evaluating the potential ROI for your next property, please feel free to email me at Mwardlaw@trophypa.com.