Decades ago, the majority of rural properties were developed and built by full-time farm and ranch families, who had extensive agricultural experience and lived on the land they worked. Today, the typical buyer may have little to no farming or ranching experience. In fact, they may not even come from a rural background.
If this sounds like you, then you’ll want to take extra care when deciding to invest in an agricultural property. Here are a few key questions to ask yourself before taking the plunge.
Will your farm be a business, or a hobby?
This is an important question for a couple reasons. First, the answer can seriously impact your tax burden. A working farm enjoys certain tax deductions so long as certain conditions are met, including maintaining records of transactions, revenues, and expenditures that increase the value of your property. If you don’t intend to seek a profit or document your transactions, then the IRS may revoke these deductions. Second, running a profitable family farm or ranch is hard work. In today’s agricultural economy, your chances of competing successfully with commercial farm operations are slim. If your goal in purchasing a farm is to turn a profit, then you’ll need to make sure you have the knowledge, the skill, and the time to adequately invest in your property.
Does the land suit your farming needs or goals?
Not every piece of farmland is suitable for every purpose. When purchasing a farm, it’s important to know what crops or animals you intend to raise there, then evaluate a property based on that information. If you want to grow fruits or vegetables, for instance, you'll want to know that you have solid ground with access to full sunlight for production of your crops. If at all possible, be sure to visit the property at different times to check slopes for stability, evaluate sunlight conditions, etc. You can also obtain NRCS reports online to evaluate soil conditions and potential yields.
How much infrastructure already exists?
Farmland needs to be worked extensively to produce results, and this will be a lot easier if your property is already equipped with the infrastructure necessary to support your farm operation. Is there a barn, grain silo, or other farm structure on the property? Are there irrigation systems in place, and are those systems appropriate for your planned crops? Does the farm or ranch come with any fencing? The answers to these questions will give you more insight on the true value of the property beyond the sale price.
What else is included in the sale?In many agricultural property transactions, a seller will include (or be willing to include) additional equipment, materials, and other physical assets that have a significant impact on the value of the property, as well as the up-front expenses you’ll need to pay to keep the property running. Such assets may include existing livestock and crops, tractors, fertilizers, etc. When negotiating the terms of a sale, be sure to consider what you’ll need in order to get your farm or ranch up and running, and see if your seller would be willing to include those items in the deal.