Make Your Farm Mortgage Work For You

Farmland is a unique asset class. It continues to steadily appreciate in value and produces annual cash income. As a farmer, revenue is derived from crop sales. But as a non-operating landowner, annual cash rent can be in the range of 2 – 5% of the farm’s value. And if you’re setting a fair cash rent, your income will increase with commodity prices or inflation. 

But as we all know, farmland is very expensive. Farm mortgages are readily available, though an average Loan-to-Value ratio (LTV) is 70% – meaning that a borrower should expect a 30% down payment at the time of purchase. While that’s certainly a hefty price, farmland is worth it, in more ways than one. This article will lay out how to structure a capital-efficient farmland purchase or in other words, how to make your farm mortgage work for you.

Down Payment

While farmland is generally seen as a stable equity investment, lenders have a riskier view. Farmer bankruptcy protections (for more information, see here) are very helpful for family farmers but make it more difficult for a lender to recoup payment on a defaulted loan. And since a farm mortgage could be a second mortgage for folks who already have a home mortgage, it’s seen as a riskier asset. As a result, interest rates on farmland are significantly higher than home mortgage rates (think ~2.0% across all maturities as a frame of reference) and down payments are a lot higher (30% vs a residential down payment of 10%).

These factors can make farmland entirely unaffordable for lots of people. But for non-operating landowners, the annual rent income on the farm could cover a farm mortgage payment each year. This means that the only actual cash to be invested is the down payment. In other words, a landowner could spend 30% of an asset’s value to own 100% of the appreciating asset.

A Real-Life Example

Let’s look at a real example. A 100-acre farm in Illinois is available for sale for $12,000/acre, or $1.2m total. For that purchase value, let’s assume a 65% LTV, meaning a buyer must have 35% available as a down payment ($420,000).

For the remaining farm mortgage value ($780,000), let’s look at a 30-year fixed payment schedule. At a 6.50% interest rate (remember, farmland rates are materially higher than home mortgages), we can expect an annual payment of $59,730.40.

Let’s assume a cap rate on the farm of 4.0% – that means annual cash rent in Year 1 would be $48,0000. This income can offset the annual mortgage payment in Year 1, requiring the landowner to pay only $11,730.40 to service a farm valued at $1.2m.

Farm Mortgage Chart - Tillable

That still requires a cash outlay from the landowner – but remember that farmland steadily appreciates over time. According to the USDA, over the last 50 years, farmland has appreciated 5.7% annually. So the value of the farm purchased in 2022 ($1.2m value + $48,000 cash rent) could now be worth $1.27m. Keeping the same 4.0% cap rate, 2023 cash rent could be $50,736. By year 5, the farm would theoretically have appreciated enough where annual cash rent would be greater than the mortgage payment. At the end of the 30-year mortgage, the farm could be worth $6m. The entire farm mortgage would have cost just over $2.2m (the $420k down payment plus $1.8m in principal and interest). And assuming a 4.0% cap rate is maintained throughout the 30-year period, the farm would have generated an additional ~$3.6m in cash rent. Excess cash returns over the 30-year period would be roughly $1.4m. For a $420,000 one-time payment, the farm could sell for over $6m. Not too shabby!



Farmland is such a productive asset – make it work for you. At Tillable, we can help you find farmland to purchase, get a competitive mortgage, and find an excellent farmer. Check us out today.


If you already know the piece of land you are going to purchase, Tillable can perform a complimentary Buyer Market Check to make sure you don’t overpay.

Related Resources

Guide to Farmland Valuation

Considering selling your farmland but don’t know its true value? Our guide helps any landowner who is considering selling their farm in 2021.

Farmland Interest Rate Volatility

As of last Wednesday, the Federal Reserve (the Central Bank of the United States) has again raised interest rates 75 basis points, or three-quarters of a percentage point.

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