A bank that lends on the 160 acres of Nebraska dryland (cropland without irrigation) you rent today will ask one thing first: what will the land be worth in 20 years? The answer decides whether you keep renting at $168 an acre a year or buy at $5,650 an acre. If the land ends at today’s price and your money could earn 6 percent a year above inflation elsewhere, owning costs $384 an acre a year. That is $216 more than the rent, or $34,560 a year on 160 acres. Renting is cheaper per year, but that alone does not show the price is too high. Write the end value you expect, run the two calculations below with seven figures, and sign the page.
Renting is cheaper each year. Is the price too high?
Not by itself, because rent and price measure different things. Extension economists at Kansas State University split what a landowner earns from cropland into two parts: the cash that comes in each year and the gain in the land’s value. In their illustration the cash is 5.5 percent of land value a year, the gain is 4.0 percent, and the total is 9.5 percent.
A landowner can accept a rent that covers only the cash part, because the gain in value is collected outside the lease. The tenant pays for the cash and gets none of the gain.
The Nebraska numbers show the same gap. In 2026, dryland cropland averaged $5,650 an acre. Cash rent, which is rent paid in money rather than in a share of the crop, averaged $168 an acre (USDA data, published by the University of Nebraska-Lincoln). The rent is 3.0 percent of the price. Kansas State puts the historical ratio for Kansas cropland at 5.5 to 6.5 percent. Those are different states and years, so do not carry either ratio to your county.
At a 6 percent return, a rent of 3 percent of the price leaves about half of the return to come from the gain. Divide the rent paid nearby by the price of comparable land, and write the result at the top of your page.
What does it cost per year to own the land?
It is not the price divided by the years. Most of the price comes back when you sell, and the money tied up in land could earn something elsewhere. The yearly cost of owning has three parts. The first is the return you give up, charged on the price at your rate. The second is the part of the price you do not expect to get back, spread over the years. The third is property tax and upkeep. The rate is what your money would earn in its next best use, above inflation. The end value is what you expect the land to be worth when your planning period ends, here after 20 years.
The standard way to turn a purchase into a yearly cost is an annuity formula, as the FAO, the United Nations food and agriculture agency, describes it. It combines depreciation (the part of the price you do not get back) and opportunity cost (the return the money stops earning). It works like the equal payments on a loan. The FAO’s example is a combine. Land does not wear out, so for land the end value is your own judgment, and no table gives it.
In the example the land ends at today’s price, so the second part is zero.
Write the yearly cost of the land on offer, with the rent beside it.
What is the land worth for what it earns?
Take the land’s net income, subtract property tax and upkeep, and divide what is left by your rate. Net income here is what the land earns from farming it, after the costs of farming and before any rent or land payment. Edwards, at Iowa State University, applies this perpetuity formula (a yearly income that goes on forever) to farmland because land does not wear out. His example is net earnings of $300 an acre at a 6 percent rate, which gives $5,000 an acre.
The example here uses the same $300 and takes off the $45 of tax and upkeep. The $255 left, divided by 6 percent, gives $4,250 an acre. The asking price of $5,650 is $1,400, or 33 percent, above that value. At a 5 percent rate the value is $5,100, and at 7 percent it is $3,643.
The price and the value meet at one rate: $255 divided by $5,650 is 4.5 percent. At an alternative return below 4.5 percent, the income alone supports the price. Above it, the price depends on the land gaining value.
Use a net income averaged over several years, and write down how many years went into it. A single good year raises the value, and so does a rate lower than what your money can really earn.
What if the land gains value?
Then the end value rises, owning costs less per year, and the purchase can pay even while renting stays cheaper. Write the end value you expect and run the cost again. With the land at $10,200 an acre in 20 years, which is a gain of 3 percent a year above inflation, owning costs $260 an acre a year. The rent of $168 is still $92 cheaper.
The net present value of the purchase is the gain or loss, in today’s dollars, from buying instead of putting the same money to work at your rate. For this case it is a gain of $455 an acre. It compares the purchase with your 6 percent, not with renting.
| End value after 20 years | Yearly cost of owning | Rent paid now | Net present value of buying |
|---|---|---|---|
| $5,100 (below today’s price) | $399 | $168 | loss of $1,135 |
| $5,650 (today’s price) | $384 | $168 | loss of $963 |
| $10,200 (3 percent a year above inflation) | $260 | $168 | gain of $455 |
Only an end value near $13,600 an acre, 2.4 times today’s price, brings the yearly cost of owning down to the $168 rent.
The growth you assume moves the answer more than any other figure. Edwards starts from net earnings of $300 an acre and a 6 percent rate. With no growth in net earnings the land is worth $5,000 an acre; with growth of 3 percent a year, $10,300; with 5 percent, $31,500.
Edwards also notes that returns to equity capital, a farmer’s own money, are typically higher than the interest paid on land purchases. In Iowa from 2005 to 2014 the figures were 9 percent against 6 percent. If your own money earns 9 percent on a real alternative, a 6 percent rate flatters the purchase.
Two calculations leave something out. Graubner and Hüttel report that farmers may prefer to buy because of the cost of negotiating leases, the cost of searching after a lease is lost, and the risks tied to both. Those costs are real and neither calculation counts them. Write them on the page, with a dollar figure if you have one.
What do I write down first, and by when?
Start with seven figures on one dated page: the asking price, the rent paid, your rate, the years you plan, the net income, the end value you expect, and the tax and upkeep. Beside each, write where it came from and who said it. Take the rent from signed leases nearby, not from asking rents.
Then work out the two rates at which the answers turn. The value meets the price at 4.5 percent, as above. The yearly cost of owning meets the $168 rent at 2.2 percent when the land ends at today’s price: the rent minus the $45 of tax and upkeep, divided by the price. Your rate of 6 percent is 1.5 points above the first and 3.8 points above the second.
Then write which calculation you will go by this year and the reason in one sentence, sign the page, and name whoever else has to agree. Write the review date: the month the lease is renegotiated or the offer expires, whichever comes first.
How the purchase is paid for is a separate calculation, in does my farm debt fit what it earns. The rent or buy land calculator runs both calculations from the seven figures.
More on this in farm management and in the planning library.