To decide whether to keep renting land or buy it, run two separate calculations: what each option costs you per year, and what the land is worth from the income it earns. On the same hectare the two can point opposite ways. A farm that runs only the first tends to turn down land at a fair price, and in a tight rental market the same habit can push it into overpaying. In the worked example, renting leaves the farm 1,800 a year and buying only 240, yet the asking price sits 5 percent below the 60,000 the land is worth from its income.
Take one hectare offered at 57,000 (the figures work in any currency, and the arithmetic is the same per acre). You rent it now for 3,600 a year. Your money could earn 8 percent a year elsewhere, you plan over 20 years, you expect the land to be worth the same 57,000 at the end, and property tax and upkeep cost 600 a year. Owning then costs 5,160 a year against 3,600 to rent, so renting is cheaper by 1,560 a year.
Now the second question. The land earns a net income of 5,400 a year. Take off the 600 of tax and upkeep, divide the 4,800 left by your 8 percent, and you get a fair value of 60,000 a hectare. At 57,000 the land is 5 percent below that, so as a price it is a good buy, by 3,000 a hectare. Both answers are right, because they answer different questions. The rent or buy land calculator runs both from the same seven figures.
The offer rarely arrives that neatly. A neighbor is selling, the lease on the same ground runs out in eight months, and the bank has already said how much it would lend. The decision then rests on whichever calculation somebody happens to run, usually the yearly one, because everyone knows the rent and nobody has yet turned the purchase price into a yearly figure.
What you should end up with is one page, dated and signed: both calculations, where each of the seven figures came from, the reason for the choice in one sentence, and the date the page gets reviewed. You build it with the checklist at the end.
Why is the yearly cost of buying not the price divided by the years?
Because most of what you pay for land comes back when you sell it, and the money tied up in it could have earned something elsewhere. The yearly cost of owning has three parts: the rate your money would earn elsewhere, charged on the price; the part of the price you do not expect to get back, spread over the years; and the tax and upkeep. In the example the land is expected to hold its full value, so the middle part is zero: 8 percent of 57,000 is 4,560, plus 600, which gives 5,160.
This is the standard way to turn a purchase into a yearly cost. The FAO, the United Nations food and agriculture agency, describes it in its handbook on farm production costs as “an annuity formula in which depreciation and opportunity cost are combined”, which works like the equal payments on a loan.
The calculator always uses that formula. When the land holds its value, as in this example, the formula gives the same 5,160 as the three parts above; the two differ only when you expect the land to lose or gain value. To check the calculator’s arithmetic yourself, use FAO’s own worked example, a combine bought for 300,000 dollars, kept five years and sold for 30,000 at a 4 percent rate: FAO gets 61,849 dollars a year, and typing that price, resale value, number of years and rate into the calculator gives 61,849.32.
Only the arithmetic carries over from the machine. A combine wears out and land does not, which is why the value at the end of the horizon is your own judgment rather than a figure from a table.
Kansas State University’s extension economists use the same method to compare a combine bought with one leased. They reject the usual shortcut of adding up depreciation, interest, repairs, taxes and insurance, because that formula “is not suitable for comparing the various alternatives”: it ignores when each payment falls. A yearly cost built that way cannot be set next to a rent.
Why does rent almost always look cheap next to owning?
Because the rent pays the landowner for only part of what owning land earns. In their extension guide on leasing cropland, Kansas State’s economists split the landowner’s return into two parts: the cash that comes in each year, and the gain in land value. In their illustration that is 5.5 percent a year in cash and 4.0 percent in value gain, 9.5 percent in all. The landowner can accept a rent that covers only the cash part, because “the landowner acquires the capital gain return outside of the lease”.
The same authors put Kansas cropland rents, historically, between 5.5 and 6.5 percent of land value. The example’s rent, 3,600 on 57,000, is 6.3 percent, inside that range.
Set that next to the yearly cost and you can see why renting usually wins the yearly calculation. Suppose the price is exactly fair, meaning it equals the income after tax and upkeep divided by your rate: 4,800 divided by 8 percent, or 60,000. With the land holding its value, owning then costs 8 percent of 60,000, which is 4,800, plus 600 of tax and upkeep: 5,400, the land’s whole income. The rent has to be lower than that income, because the tenant farms the land and has to keep something for the work and the risk.
So when the land is fairly priced and is not expected to gain value, renting comes out cheaper per year wherever rents work this way. That is not because the price is high; the two numbers are built differently. “Renting is cheaper this year” is not evidence that a price is too high, and a farm that reads it that way will keep turning down fairly priced land.
What is the land worth from the income it earns?
You divide instead of multiplying. If the land earns the same net income every year with no end, its value is that income divided by your rate; appraisers call this capitalizing the income. Edwards, writing in the peer-reviewed Journal of Applied Farm Economics, notes that this shortcut suits land because farmland can be assumed to produce earnings indefinitely.
Take the tax and upkeep off the income before you divide. The yearly cost already charges them, and leaving them in the income would make the land look worth more than it is. Lima, in a paper for Brazilian appraisers on valuing rural property from its income, does the same and lists taxes, insurance and maintenance among the expenses taken out first.
The division is short, and the assumption behind it is big: the income repeats every year, forever, without growing. Edwards shows what that assumption is worth. In his worked case, net earnings of 300 dollars an acre at a 6 percent rate before tax give a land value of 5,000 dollars an acre with no growth, 10,300 with 3 percent growth a year, and 31,500 with 5 percent. The same land and the same starting income give values more than six times apart, depending on a growth figure nobody can check.
That makes the income the figure most easily inflated on the page. Use the average of enough seasons to include a bad one, net of every production cost including your own labor. Building that margin before the crop cycle starts is the subject of the article on what this crop should leave you. One good year typed into a formula that assumes forever can give a fair value twice the real one without a single arithmetic mistake.
The calculator takes the cautious side on growth: it has no box for it and treats the income as flat. The one figure where optimism can slip in is the value at the end. Type an end value above today’s price and you are betting that land prices will rise. Edwards warns that when land values climb fast it is tempting to assume they will keep climbing, but history tells a different story. Before deciding, run the purchase with the end value equal to today’s price and see whether the income alone pays for it. If it does not, what you are buying is a hoped-for price rise, not farm income.
Where exactly do the two calculations disagree?
Run the whole example and the gap is not rounding. It has an exact size.
| What the calculator is given | Figure |
|---|---|
| Asking price a hectare | 57,000 |
| Rent actually paid, a year | 3,600 |
| What your money earns elsewhere | 8 percent a year |
| Horizon | 20 years |
| Net income the land earns, a year | 5,400 |
| Value expected at the end | 57,000 |
| Upkeep and property tax, a year | 600 |
| What comes back | Figure | Which calculation |
|---|---|---|
| Yearly cost of buying | 5,160 | yearly cost |
| Yearly cost of renting | 3,600 | yearly cost |
| Difference per year | 1,560 in favor of renting (shown as -1,560) | yearly cost |
| Fair value from the income | 60,000 | value |
| Asking price against fair value | -5.0 percent, and negative means cheap | value |
| Net present value of buying | 2,356.36 | value |
One subtraction links the two. Renting, the farm keeps 5,400 of income minus 3,600 of rent, which is 1,800 a year, with no money tied up in land. Buying, it keeps 5,400 minus the 5,160 yearly cost, which is 240 a year, and the 8 percent the money would have earned elsewhere is already counted inside that 5,160. The difference between 1,800 and 240 is the 1,560 of the yearly calculation. Those same 240 a year, added up over 20 years in today’s money at 8 percent, come to 2,356.36. That is the net present value: what the purchase earns over and above your 8 percent.
Rurivia calculation from the example’s price, rent, rate, horizon, income, tax and upkeep.
The reverse case is the dangerous one. Suppose the local rental market is tight and the asking price firmer: 72,000 to buy, 6,800 a year to rent, the land still worth 72,000 at the end, and the rate, horizon, income and upkeep unchanged. Owning now costs 6,360 a year against 6,800 to rent, so by the yearly calculation buying wins, by 440 a hectare a year. By the value calculation, the price is 20 percent above fair value and the purchase loses 9,425.42 a hectare in today’s money.
Before you believe that “buy”, divide the rent by the price: 6,800 over 72,000 is 9.4 percent, well above the 5.5 to 6.5 percent Kansas State reports. The rent is out of line, not the price. A rent pushed up by a tight market can fall when the market loosens, while a price paid stays with you for twenty years. Do that division whenever the yearly calculation switches to buy.
At what rate does each calculation flip?
You can work out how close each answer is to flipping on the back of the offer letter. There are two rates, and neither appears on the calculator’s screen.
The yearly calculation flips when the rent equals the yearly cost of owning. With the land holding its value, that happens at the rent minus upkeep, divided by the price: 3,600 minus 600, over 57,000, which is 5.3 percent. Below that rate owning is cheaper per year; above it, renting is.
The value calculation flips when fair value equals the asking price. That happens at the income minus upkeep, divided by the price: 5,400 minus 600, over 57,000, which is 8.4 percent. It is the return the land itself pays at the asking price. Below that rate the price is cheap; above it, high.
The gap between 5.3 and 8.4 percent is what the tenant keeps, written as a rate. Any rate inside that gap produces the split in the table, and the example’s 8 percent is inside it. At 5 percent both calculations favor buying; at 9 percent both favor renting.
From that you can see how firm each answer is. The yearly answer has room: your rate would have to fall from 8 to below 5.3 percent to reverse it. The value answer is on a knife edge: at 8.5 percent the 5 percent discount already becomes a premium. Write both distances next to both answers, so that anyone reading the page a year later can see how close the call was. The same habit, applied to any decision that hangs on one figure, is the subject of the article on recording the option you turned down.
What if the two keep disagreeing, as they do here? Turn the flip rates around and you get a price and a rent. For the yearly calculation to favor buying at your 8 percent, the price would have to fall to the rent minus upkeep, divided by the rate: 3,000 over 8 percent, or 37,500 a hectare. That is 37.5 percent below fair value, and no seller will take it.
Or the rent would have to rise to 5,160, which is 9.05 percent of the asking price, far above the 5.5 to 6.5 percent Kansas State reports. No negotiation makes both calculations agree on this tract, and in a working rental market that split is normal, as the section on cheap rent showed.
So the decision is not which number is bigger. It is which matters more for this farm this year: cash or return. If cash is short, go by the yearly calculation, and treat a fair price only as a reason to keep the tract in mind for later. If the farm has spare money that in practice earns less than the rate you typed, go by the value calculation: the yearly one charges the purchase a return your money would not really earn elsewhere, and a price that looks fair at your rate looks better still at a lower one.
Where does the rate come from, and why does everything turn on it?
From what your money could really earn elsewhere, not from a table. Edwards describes the rate these tools need as the buyer’s cost of capital, weighted by the relevant mix of debt and equity: the interest on borrowed money and the return expected on the farm’s own money. He adds that “Returns to equity capital are typically higher than interest rates for real estate purchases”.
The rate matters most inside the yearly calculation. Comparing the yearly cost of owning with a rent assumes that the money you did not spend on land earns exactly your rate somewhere else, every year of the horizon. If nothing on the farm or off it really pays 8 percent, the 4,560 charged for it inside the 5,160 is not a real alternative, and renting only looks cheaper. If the farm can really put money to work at 8 percent and has more such uses than money, the charge is real and probably too low.
What do both calculations leave out?
The yearly calculation leaves out the income, on purpose. It sets the cost of owning against the cost of renting, and that works only because the same ground under the same farmer earns the same income whether rented or owned, so the income cancels out. If buying would change the rotation or the scale of the operation, that stops being true, and you need a full budget instead.
Everything else that is missing sits on one side. The rent leaves out what a lease can cost you. Graubner and Hüttel, in a peer-reviewed study of how land rents and sale prices are set, note that “farmers may prefer buying it due to the transaction costs of negotiating rental contracts, the search costs associated with losing contracts and related risks”. None of that is in a yearly rent. A lease that is not renewed costs the farm its rotation, what it put into the soil and, that same season, ground it has to find elsewhere.
Renting also has an advantage the numbers miss: you can walk away. A tenant hands the ground back at the end of the lease, while an owner cannot hand the land back in a bad year without selling at a bad year’s price. That freedom is worth something, and neither calculation includes it. Putting a price on it takes arithmetic this calculator does not do, so write it down beside the rent, in words, before you compare.
On the purchase side, the missing items are entry costs that depend on the country: transfer tax, closing and registration fees, brokerage, and the tax on a future sale. Add them to the price before you type it, or the yearly cost comes out too low.
The last one is whether you can pay for it at all. The FAO handbook notes that the choice also depends on the availability of capital assets on the market and the ability to finance their purchase. Whether the loan payment can be met each year is a separate calculation, and it is the one that gets farms into trouble first. That calculation is the subject of the article on your debt and its coverage. The yearly cost here is an economic cost spread over the years, not a payment schedule, and a lender will want the payment schedule.
When do the rent and the price stop tracking each other?
Rent and land price are set in two different markets. Graubner and Hüttel point out that in land sales “every transaction is specific, location matters and in a typical constellation a single seller meets several potential buyers”, while in renting the same farms bid year after year for the same fields.
That matters when you choose the rate for the fair value. They warn that using an area’s rent-to-price ratio as a stand-in for what farming will return may produce biased results, because rents and sale prices can drift apart, most of all after a sharp change in crop prices or when the land has another possible use. So do not use your area’s rent divided by land price as the rate that turns farm income into a land value: that ratio tracks what landowners collect in rent, not what farming the land earns. It still works as a check on whether a rent is out of line, as in the case of the 6,800 rent.
In practice, when grain prices jump, land prices tend to move first and rents follow late or not at all, because a rent is negotiated with the landowner and fixed in the lease rather than reset to this season’s revenue. A farm that runs the value calculation with this year’s prices and the yearly one with a rent signed three years ago is comparing two different moments.
Why does the same offer get a different answer on two farms?
Because the rate belongs to the farm, not to the land. Two neighbors looking at the same hectare at 57,000, with the same 5,400 of income and 600 of upkeep, get opposite answers if one can really earn 9 percent on money and the other 5. For the first, the price is 6.9 percent above fair value and buying loses 3,012 a hectare. For the second, the price is 40.6 percent below fair value and buying gains 24,301.
Same tract, same offer, same day. That is why the calculator gives both results and no single verdict: choosing between them depends on what that farm’s money can do, and only the people running that farm know it. A Brazilian study of eucalyptus on ten properties in São Paulo state found the same split in practice, with the return falling below the minimum once the land was bought instead of rented on half of them; it is forestry in another country, so read it as a sign that the answer depends on each property’s own yield and price, not as a benchmark.
There is one case where the yearly calculation can be set aside, and it is common. A farm with no realistic other use for its money, no wish to spend its borrowing capacity elsewhere, and a lease the landowner may or may not renew is not choosing between two comparable options. It is choosing between owning ground and possibly not farming it at all. With the value calculation that farm can still check whether the price is defensible; the yearly one is the answer to a question the farm is not asking.
Two other questions sit next to this one. Whether this tract belongs on the farm’s list of planned purchases at all is worked out in a written investment plan, an article on setting investment priorities before any offer arrives. Whether a purchase pays back its cost over its life at your rate is the arithmetic in does this investment pay for itself, which applies to land too, over a horizon of a generation.
A decision this size is made once and lived with for twenty years. The farm management guide covers how a decision like this one fits into running the whole farm, and the planning articles cover the plans it depends on.
Where to start
Two to three hours, with the offer letter, the rents in the last three leases you can find out about nearby, and the farm’s records of income and costs. The result is one page with both calculations, dated and signed. The calculator does the arithmetic; each item below is a figure it cannot find for you.
Which figure goes out of date fastest?
The rent. Of the seven figures, the asking price expires with the offer, the income is an average that moves slowly, the tax and upkeep barely move, and your rate changes only when your alternatives change. The rent is renegotiated on a calendar someone else controls, and on its own it can swing the yearly calculation. A page built on a rent that has since been renegotiated is the answer to a question that no longer exists. That is why the review date on the last line is the lease date, not an anniversary of the page.