Using some real numbers from Purdue's annual land price survey
in 2013 an acre
of average farmland in west central Indiana went sold for about $9,000 while the rent on that same acre of land was $282. Property taxes on farm land are not based on what the land actually sells for, and instead are calculated on a government specified base rate. For 2013 that base rate was $1,810, and Indiana has a 2% property tax rate on farm land, so taxes on that acre of land would be about $36 ($1,810 x 2%) for a profit
of $246. Even ignoring the taxes due on the rental income, that $246 would be a 2.7% rate of return on the $9000, which doesn't seem too bad until you realize the inflation rate for 2013
was about 1.5% thus bringing your real rate of return down to 1.2%.
That being said, farm land has been a good investment for the past 20 or so because people have been willing to pay more and more to buy the land regardless of what they are getting in rent. In many ways, buying farmland today is a lot like buying residential rental property in the San Francisco area
. In both areas, the annual rent off the property is running about 3% of the purchase price, and investors are buying these properties not because of the rental income, but because they think
they will be able to sell
the property for much more than they paid. Sometime this is called the "greater fool theory
." Side note: given equal rents, I'd much rather rent farmland because your farm tenant will never call you in the middle of the night about a leaking water heater
While an increasing world population and a very fixed quantity of farm land bodes well for the long term (50+years) increase in farmland value, there are several factors that could seriously decrease the value of farmland in the next 10 years. For example, rising interest rates or a rapid decrease in ethanol demand, could cause a 1970s/80s type of farmland crash.