Buying farmland involves more than paying the purchase price. First-time farmland buyers can be surprised by costs such as loan interest, closing expenses, property taxes, insurance, drainage and tile repairs, surveys, legal fees, conservation work, and ongoing property improvements.
Some of these costs occur at closing. Others may not appear until months or years after you own the farm.
That is why buyers should look beyond the price per acre when deciding how much farmland they can afford.
If you are considering buying farmland in Iowa for the first time, here are several expenses to plan for.
1. The Down Payment
The down payment is usually one of the largest upfront expenses.
The amount required depends on the lender, borrower, property, loan structure, and other factors.
For example, a buyer purchasing a $1 million farm with a 10% down payment would need:
$100,000 for the down payment
However, that does not mean $100,000 is all the cash the buyer may need.
There may be additional costs before and after closing. Therefore, buyers should avoid putting every available dollar into the down payment without planning for other expenses.
Talk with an agricultural lender early in the process. This can help you understand the amount of cash you may need to complete the purchase.
2. Loan Interest
Farmland financing can be a major long-term expense.
A buyer may focus on whether the monthly or annual payment is affordable. However, interest can add significantly to the total cost of owning the property.
The interest rate, loan term, amortization schedule, and down payment can all affect the total amount paid.
Even a relatively small difference in interest rates can become significant on a large farmland loan.
Before purchasing, ask your lender to show you:
- Estimated payment
- Interest rate
- Loan term
- Amortization period
- Total interest
- Balloon payment, if applicable
- Fees associated with the loan
Understanding the entire loan structure is more useful than looking only at the purchase price.
3. Property Taxes
Iowa farmland owners generally need to budget for annual property taxes.
Property taxes vary by property and location.
Before making an offer, review the current tax information for the farm. Also, find out how taxes will be prorated at closing.
Property taxes become part of your annual cost of ownership, so include them when estimating the farm’s potential return.
4. Closing Costs
A farmland purchase may also involve closing-related expenses.
Depending on the transaction, these could include:
- Legal fees
- Recording fees
- Loan fees
- Title-related expenses
- Abstract-related expenses
- Survey expenses
- Other transaction costs
Who pays a particular expense may depend on the purchase agreement and local practices.
Therefore, review the purchase agreement carefully and ask questions before signing.
5. Survey Costs
Not every farmland purchase requires a new survey. However, a survey may be needed in certain transactions.
This can be especially important when:
- A new tract is being created
- Boundaries are uncertain
- The property is being divided
- An acreage is being separated from farmland
- Access needs to be established
- A lender or other party requires one
Survey costs can vary based on the size and complexity of the property.
If a survey may be necessary, determine who is responsible for the expense before closing.
6. Drainage and Tile Repairs
This can be one of the larger unexpected costs of owning Iowa farmland.
Good drainage can be extremely important to productive cropland.
A farm may have existing tile. However, tile systems can eventually need repairs or improvements.
A new owner may discover:
- Broken tile
- Plugged tile
- Inadequate drainage
- Old clay tile
- Areas that need additional pattern tile
- Drainage outlets that need work
Installing or improving tile can require a significant investment.
Before buying, ask whether tile maps are available. Also, look for information about drainage districts and existing drainage systems.
7. Drainage District Assessments
Some Iowa farmland is located within a drainage district.
Depending on the district and future projects, landowners may face assessments related to drainage improvements or maintenance.
A first-time buyer may not think about this when calculating the annual cost of owning the property.
Therefore, investigate whether the farm is part of a drainage district and whether any known assessments exist.
8. Conservation Work
Farmland ownership can also involve conservation responsibilities.
Depending on the property, you may need to maintain or improve:
- Terraces
- Waterways
- Buffer strips
- Erosion-control structures
- Conservation practices
- CRP acres
Some projects may qualify for cost-share programs. Others may be the landowner’s responsibility.
Understanding the farm’s conservation needs before purchasing can help you plan for future expenses.
9. Building and Improvement Costs
If the farm includes buildings, those improvements can create additional expenses.
For example, the property may have:
- Grain bins
- Machine sheds
- Barns
- Livestock facilities
- Houses
- Fences
- Wells
- Septic systems
These improvements may add value, but they also require maintenance.
A roof eventually needs repair. Grain equipment can wear out. Fences need maintenance.
Therefore, buyers should consider the condition of improvements rather than simply viewing them as additional assets.
10. Insurance
Insurance is another ongoing ownership expense.
The amount and type of coverage will depend on the property.
A bare farmland tract may have different insurance needs than a farm with buildings, grain storage, livestock facilities, or a house.
Your lender may also have insurance requirements.
Talk with an insurance professional before closing so you understand the coverage and estimated cost.
11. Farm Management
Not every farmland owner farms the property themselves.
If you purchase farmland as an investment, you may decide to hire a professional farm manager.
A farm manager may help with tasks such as:
- Finding tenants
- Negotiating leases
- Collecting rent
- Monitoring the farm
- Coordinating improvements
- Managing conservation issues
- Communicating with operators
Farm management can be useful, especially for absentee landowners. However, it is another expense that should be included when calculating your net return.
12. Repairs You Did Not Expect
Land is durable, but farmland is not maintenance-free.
Unexpected expenses may include:
- Culvert replacement
- Driveway repairs
- Fence repairs
- Tree removal
- Tile repairs
- Erosion repairs
- Well work
- Building repairs
- Cleanup
A farm that looks simple from the road may still have ongoing maintenance needs.
For that reason, buyers should consider maintaining a cash reserve after closing.
13. Costs Associated With a Farm Lease
If you purchase a rented farm, understand the existing lease.
Important questions include:
- Who receives the current year’s rent?
- When is rent paid?
- When does the lease end?
- Who has possession?
- Who pays for certain improvements?
- Are there crop-share expenses?
- Are there reimbursement agreements?
Do not assume you will immediately receive rental income after purchasing the property.
The purchase agreement and existing lease can affect how income is handled.
14. The Cost of Owning Non-Income-Producing Acres
Not every acre of a farm generates the same income.
A 160-acre farm may include:
- Tillable cropland
- Timber
- Waterways
- Roads
- Building sites
- Creeks
- Ponds
- Waste acres
Therefore, paying $12,000 per gross acre does not mean every acre produces enough income to support that value.
First-time buyers should understand the difference between gross acres and productive acres.
This is especially important when comparing farms.
15. Improvements You Choose to Make After Closing
Some expenses are not required. Instead, they are investments you decide to make.
After purchasing a farm, you may want to:
- Install tile
- Improve drainage
- Build grain storage
- Add a driveway
- Remove fences
- Clear brush
- Improve waterways
- Build terraces
- Add fencing
- Improve access
These improvements may make the property more productive or useful. However, they require additional capital.
When deciding how much you can afford to spend on the purchase, consider what you may want to do with the farm afterward.
16. Opportunity Cost of the Down Payment
This cost does not appear on a closing statement, but it is still worth considering.
Suppose you use $200,000 as a down payment on farmland.
That money is now invested in the farm. Therefore, it is no longer available for another land purchase, equipment, your farming operation, another investment, or other uses.
That does not mean buying the farm is a poor decision.
Instead, it means you should consider what else your capital could accomplish.
For farmers, this can be particularly important because working capital is also needed to operate the farm business.
How Do I Calculate the True Cost of Buying Farmland?
Do not stop at the purchase price.
Start with:
Purchase price + financing costs + closing costs + immediate improvements + annual ownership expenses
Then estimate the income the property may generate.
For a rented farm, that may include cash rent. For an owner-operator, the analysis will be different because the land becomes part of the farming operation.
The goal is to understand how the property fits into your entire financial picture.
Should I Keep Cash Available After Buying Farmland?
Having cash available after closing can be important.
Using every available dollar for the down payment may leave little room for unexpected repairs or improvements.
For example, imagine purchasing a farm and discovering six months later that a major tile repair is needed.
The farm may still be an excellent purchase. However, the repair becomes much easier to handle if you planned for unexpected expenses.
Talk with your lender, CPA, and financial advisors about an appropriate amount of working capital or reserves for your situation.
What Should I Ask Before Buying an Iowa Farm?
Before purchasing, ask questions such as:
- What are the annual property taxes?
- Is the farm in a drainage district?
- Are there known drainage assessments?
- Is there a tile map?
- What condition is the tile in?
- Are there conservation requirements?
- What condition are the buildings in?
- Is the property currently rented?
- When does the lease end?
- Who receives the current rent?
- Are there easements?
- Will a survey be needed?
- What are my financing costs?
- What improvements will I want to make?
- How much cash should I keep after closing?
These questions can help you better understand the property before committing to the purchase.
What Costs Surprise First-Time Farmland Buyers the Most?
The biggest surprises are often expenses beyond the down payment and purchase price. Property taxes, financing costs, tile and drainage work, closing expenses, surveys, conservation projects, insurance, building repairs, and future improvements can all affect the true cost of farmland ownership.
That is why a buyer should not ask only:
“Can I afford to buy this farm?”
A better question is:
“Can I afford to buy, finance, improve, and own this farm?”
That gives you a much more complete picture.
Planning Before You Buy Iowa Farmland
Buying your first farm can be a major financial decision.
Before bidding at an auction or submitting an offer, understand both the property and the costs that may come with owning it.
Talk with an agricultural lender about financing. Review the property information carefully. In addition, involve your attorney, CPA, insurance professional, and other advisors when appropriate.
At Whitaker Marketing Group, we work with farmland buyers throughout the purchase process. We can help you evaluate Iowa farmland opportunities, understand property information, and navigate the auction or purchase process.
Thinking about buying your first Iowa farm? Contact Whitaker Marketing Group to discuss available farmland and what to consider before making an offer.
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