Seth: How much is farmland per acre? Like what would be a normal average price to pay?

Why is land so expensive in places like Iowa and Illinois that are just sort of known as like some of the best places in the world for crops and that kind of thing?

Pat: Nobody wants to spend $4 million on a farm to buy somebody else's environmental issue.

Commodity prices are just kind of are what they are today versus the last number of years. We've seen prices go up, but we haven't seen the commodity prices just racing out of sight. If I've got like $50,000 and I want to buy a piece of farmland just to get my feet wet, is that enough money?

Seth: Like what is the smallest piece of farmland I could get with financing from a bank?

Like if you were to buy a piece of farmland, what kind of yield would you want to see to say, yes, this is a good deal?

Pat: What I would want to see, I guess, is…

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Seth: Hey, everybody, how's it going? This is Seth Williams. You're listening to the REtipster podcast. And today I'm talking with my friend, Pat Porter.

So this is my second interview with Pat. The first time I talked with him was back in episode 153, where he gave us a ton of great insight into the life of a land broker, how to find a great one, and even what the profession is like and what kind of person is best suited for that line of work. But something you didn't hear in that episode was some of the expertise that Pat has about farmland.

And I didn't even realize this the first time we talked, but after I stopped recording, Pat and I continued to talk casually about farmland for about a half hour or so. And I learned so much from the guy about how farmland really works.

And that was when it hit me that I needed to get back on the podcast at some point so we could have a whole separate conversation about farmland. Because there's a lot you need to know if you ever want to buy this kind of land. And Pat is going to give us kind of a crash course, a lot of that information in this conversation.

And just before we hit record here, I was asking Pat, so like, how authoritative of a figure are you in farmland investing? And he was saying, not really, like I'm not the authority on it, but he was saying that maybe one in five of the deals that he works with are farmland in some way, shape, or form. And that's a whole lot more experience than most people in the REtipser audience. So while he may not know everything, I think he still knows a lot. And so we're going to glean as much as we can from him right now.

So Pat, welcome back. How are you doing?

Pat: Hey, Seth. Good, man. Good to see you. Good to be on your show again.

Seth: Appreciate it. So we already kind of heard your backstory in episode 153. If anybody wants to go back and hear how Pat got into the business of being a land broker, they're welcome to listen to that earlier conversation.

So I'm just going to jump right into the farmland stuff. And was I right in saying that maybe 20%, 25% of your deals are farmland? Does that sound about right?

Pat: Yeah. And again, I just pulled that number out of my ear a minute ago. I don't keep hard metrics on all that, but it's the smallest overall piece of what we do. But when you do several farms a year and some of them small, some of them big, I guess it does weigh in there, they're maybe one-in-five or one-in-six deals.

Seth: Sure, gotcha. So you live and work in Louisiana, right? So are most of the deals that you work on in that state? Or how often do you work on these kinds of deals in other states in that area?

Pat: Ah, well, RecLand, my company, is in a number of states. I think we're in seven states, but most of the farm deals that we do are here in what we call the Delta—Louisiana, Arkansas, Mississippi—are most of our farmland deals.

Seth: So if somebody is kind of agnostic about which markets they work in, like if I want to go out there and buy farmland, I don't really care where it is, I just want it to be in the U.S. I want it to give me some kind of yield. I mean, do you have an idea? Like what are the top three to five states they should be looking at?

I don't know if you know that, given where you work, but does anything come to mind? Like, yeah, check out this, this, and this state.

Pat: Well, I'm really partial to our part of the universe down here, you know? I really am. But, you know, just like you, I see a lot of action taking place in the Midwest, where farmland prices are just exorbitant, ridiculous, absurd, through the roof, you pick your adjective. And so those things always jump off the page when I see that.

But my expertise—what little bit I do know—is down here in our part of the world. And I guess I'm biased to the Delta area down here.

Seth: Yeah. That makes sense. Well, and when you say the prices are through the roof, what does that mean? Like how much per acre are we talking about, in your book, means this kind of ridiculous? And what's a more normal, reasonable price for farmland?

Pat: Well, again, that's my way. And that's all just a matter of perspective from your vantage point, you know, because we'll sell farms down here for 3,000, 4,000, 5,000 an acre.

And then I see deals that are going off at 6,500, 7,500, 8,500, even 10,500 an acre in Illinois, Iowa, and parts of the Midwest. Double what we're doing down here.

And I know everything is not exactly apples to apples, but still, you just look at those comparative numbers and you go, wow, when you look at that, a $10,000 an acre deal in the Midwest somewhere versus a $4,500 an acre deal down here. I mean, it's just, wow.

Seth: Now, why is land that expensive? Like, is that inflated? Like, are people actually getting a return to justify that? Or is there some other weird reason why people are overpaying for farmland? Any ideas on that?

Path: You and I discussed that back at the end of episode 153 a little bit. I actually talked to one of my agents yesterday. His family is a generational, second-generation farmer, and he sold a number of farm tracts himself. Very knowledgeable guy.

And he kind of reached back into the '90s when Alan Greenspan used the phrase “irrational exuberance,” I believe was the phrase he used. He wasn't talking about farmland, but he was talking about just how our irrational exuberance, I believe is the Greenspan phrase, where he and I are just scratching our heads going, in our little peanut brains, we can't figure out how to make the economics work on some of these numbers.

So I don't really know how the economics work on some of those Midwest deals. I've got my opinion, my hunch, but I don't necessarily know for sure how they're making those things work.

Seth: Gotcha. Maybe more of a fundamental question is why buy farmland at all? Like if I'm a, I don't know, a newer land investor, I've got a bunch of money laying around. I want to park it somewhere.

What is the appeal of farmland? Is it just because it's easy? You don't have to do anything, like zero maintenance. Is that why people do it? Or is there some other, I mean, I guess if you were a farmer yourself and you were working the land, that would probably make a lot of sense. But aside from that, is there any other reason why you would go out of your way to buy farmland?

Pat: Well, as an investor, renting your farmland is relatively easy in this day and time. If I've got a strip center, just to pull the commercial piece, for example, I've always had turnover in tenants. I've always had issues.

And not that there's anything wrong with commercial investment at all. I know people do it. Everybody does. A lot of people do it well. It's just what you prefer.

In my opinion, farmland is probably a touch easier than something like that. It's a lot more hands-off. You've got an operator there, the farmer, who's got a deeply vested interest in making it work. And so they are watching all the little pieces, all the components of it. And so, you can be a little more removed from it on the investment side.

As of now, it's always in demand. You look at some of the bumper sticker phrases, you know, the world's not getting any bigger, but the population is growing. And so people have to eat and farmland is always going to be in demand.

Seth: I don't have any hard statistics on this or anything, but it seems like more and more agricultural land is going out of production every year, at least when I look around my market. I mean, it seems like every year I see a new parcel of farmland that is no longer being farmed. It's being developed into a residential subdivision or something like that.

Is that accurate? That we're losing farmland every year? So it's sort of an asset base that's getting smaller and smaller every year?

Pat: I would guess… my guess is that we are losing some actual tillable acres. My guess is that, because not only does some of it go into a higher and better use for, say, development, but also a lot of it, you know, you've got the USDA programs. You know, WRP, WRA, CRP, all the different programs that people are putting their farmland into. And so those acres are coming out.

However, we also sell a good number of tracts of CRP that are being put back into production. So, I don't know the exact data like you, but my guess is we're losing some acres, but we might not be because stuff is going out of production, but there's also stuff going into production as well or back into production.

So that's a great question, I'd love to see some hard numbers to know the actual acreage. Is it increasing or decreasing?

Seth: And when you say CRP, what does that mean?

Pat: Conservation Reserve Program. It's a USDA program similar to WRP where farmland is taken out of production and put into wildlife habitats. Depending on what part of the country it's in, it may go into trees, it may go into grassland, but just put into a conservation program for wildlife habitat.

The Department of Agriculture pays an annual rental rate to the landowner for the right to be able to keep that land in a conservation program. So it's income to the landowner without having to lease it out to farming.

Seth: Is that subsidy that they're getting, is that about what they would be making if they were leasing it out to a farmer? Is it less, do you think? Or do you know anything about that?

Pat: Yeah, it's... As soon as I say this, there's going to be somebody out there who's going to raise the exception flag and go, “No, you're wrong because I know a place!” Okay, there are probably some exceptions.

I know, in general, in our part of the world, what the CRP rental rate is. And when you compare that to cash rent for farmland, it's a little less, but it's also guaranteed. It's hands-off. You never have to do anything. Never have to touch it. It's a check that comes annually, once a year. You don't do anything to the property.

So yeah, if it's a little less, there's some trade-off in that you're not having to be hands-on anymore with your property. You literally can put it in a program, walk away, and forget about it.

Seth: Do you know why that's a thing? Why is the government paying people to not do anything? I'm sure there's some rationale behind that. Do you know what that is?

Pat: I don't want to mislead anybody… Those USDA programs—WRP, CRP, those types of conservation programs—are not the government just giving you money to leave your land alone. There is a purpose there. It's taking substandard, according to somebody's definition, farm ground, taking it out of production and putting it back into either wetland habitat, wildlife habitat, trees, and grasses.

So there's some value to that. It's not a straight, “We'll give you money just not to farm your land.” You do have those types of programs that farmers will understand better than I do, where you lay out land and you're paid a little bit not to farm it. But those CRP, WRP, those types programs, in my opinion, are not exactly that.

Seth: So, you might've already said this, but I know the answer to this question is going to vary a lot by state. But when you look at your neck of the woods in Louisiana and the surrounding states, how much is farmland per acre? What would be the normal average price to pay?

Pat: Just ballpark figures ahead, this part of the country down here, the last dry farm I sold down here not long ago was $3,900 an acre, which is a little bit strong for dry farm ground, at least compared to what it has been.

And then irrigated ground, $4,800 to $5,500 an acre. Now, there are some exceptions. There are a few unicorns out there that we've seen sell for like 65, which is, you know, down here in our part of the world, it seems unheard of. In fact, when I heard it, I was going, wow, I can't believe it sold for that. But again, that's not anywhere near some of the numbers we see in the Midwest.

But the dry ground, ballpark, high threes, low fours. Good, irrigated farms, now high fours, fives, and even into the sneaking into the low sixes an acre.

Seth: Correct me if I'm wrong about any of this stuff, but my understanding in terms of, why is land so expensive in places like Iowa and Illinois that are just sort of known as being some of the best places in the world for crops and that kind of thing?

And I think it has a lot to do with annual rainfall. Like, if you just don't have an irrigated farm and you just rely on nature to water your crops, is it going to happen? Or are they going to dry out and you're going to lose everything? So it's that kind of thing.

There's also the soil type. There's also the type of crops that can be grown because certain crops may be worth more than others.

And there's a lot of stuff beyond that. I actually have a blog post where I looked pretty deep into this, and looked at over seven different nationwide maps that kind of point out these areas are good because of this reason. And it's obviously not just one thing you'd look at, but a lot of different factors.

But am I on the right track? Is there other stuff that influences the value of land beyond that?

Pat: Well, those are excellent points. Because, generally in the Midwest, you've got, across the board, a little bit of different soil types to grow grains, the rainfall that you mentioned. So there's a little bit less irrigation cost.

But still, you know, the cost of diesel is the same across the country. The cost of nitrogen is the same. “Inputs” is a phrase you'll hear farmers use a lot, what it costs to put a crop in the ground, the input cost. Those input costs are still as strong up there for the most part as they are down here in the Delta, but the prices are double in the Midwest than they are down here.

But the part where I scratch my head is good as the soils are, say, just use Iowa for example, Iowa, Illinois, those places, they're not growing 600 bushels an acre corn. We grow some strong corn down here. We may be in the low mid-200s a bushel an acre.

And then you go, okay, everything being equal, that means I should be growing about 400 bushels an acre in Iowa. They're not. The yield doesn't keep up with the ratio and yield increase doesn't keep up with the ratio and the land increase.

And that's the part where we kind of scratch our heads a little bit and go, how are they making this work? The commodity prices are the same there as they are here. And the yields are not that much greater. They are greater on average, but not double and triple.

So these other factors that you mentioned, they do cut into it a little bit in terms of being able to make the return stronger. But I'm mumbling a little bit because again, I keep bumping my head against the wall going, how do they make $8,500 an acre of land work? How do they pencil that out with the cost of growing that crop?

Seth: I'm also speaking a little bit out of ignorance here. I don't know, but I do have a cousin-in-law, husband of my cousin, who is a pig farmer in Iowa, kind of over by South Dakota, and he owns a lot of land.

He was telling me something about how—and this was like 10-plus years ago—apparently a lot of farmland owners from California will buy up land in Iowa and drive the prices way up, way higher than they should be. And I don't know what the play on that is. I don't know if they just have a ton of extra cash and they're just trying to park it somewhere.

I'm not really sure, but I think you're right in terms of whatever financial yield you get from that. I don't know that it makes sense, but if you have millions just sitting around and you don't know what else to do with it, and you happen to be in the farming business, why not buy farmland? Maybe there's something going on there is my only guess.

Pat: Let me tell you, and maybe some of your listeners will be able to make some comment when this is released down the road and give us some insight because you got a smart audience and they're a lot smarter than I am. So let me give you my theory on why that works up there.

And I'm probably so far off-base that everybody's going to laugh, but it's the only thing I can make make sense in my mind.

You've got these generational farmers that own their land. They own it outright and they've been multi-generational farmers. You hand it down and they've got, say, 2,000, 3,000, 5,000 acres, whatever.

A farm comes up for sale that either joins them or nearby in their footprint, so to speak, that they can then roll that into their operation without it being burdensome. And they can then pay, just for conversation's sake, say $8,000 an acre. Crazy number in my opinion, but they can pay $8,000, $9,000 an acre for an 80-, 90-, 200-acre tract that comes up for sale.

Well, they paid that crazy amount. They roll it into their existing footprint that really doesn't have any debt, so to speak, in terms of their land cost. And so they've taken that seven, eight, nine thousand dollars an acre for a couple of hundred acres, spread it out into their whole operation.

And they've diluted the cost of that land down greatly just by rolling it into their existing operation. And it becomes very manageable at that point. That's the only thing that I can see how that works.

But then you throw a wrench into it when you talk about these outside investors who don't have that existing footprint leverage, so to speak, that they can just roll something into and dilute the cost out.

They're coming in. Now they've got a big debt nut to service in addition to all the normal costs and expenses of owning ground or farming land; how they make that work, Seth, I don't know. But my little humble theory of how owner-operators just roll it into their existing farm footprint, I can see how that works because that makes economic sense to me. I can do the math on that. I'm not a smart guy, but I can do that little bit of math. I can go, yeah, I can make that work.

Seth: Absolutely. No, it totally makes sense. Say, if you're already farming a bunch of ground and there's like a parcel right across the street, it could make a lot more sense for you to do that than for some other person who has to travel 20 miles to get there to do it. Maybe there's some economies of scale there too.

Pat: The economies of scale is a very good phrase for it to kind of boil it down. But that's exactly, that's the only thing I can understand. I hope some of your listeners will have some insight will jump in here in a month or so or whenever this is released, a couple of months and go, no, hey guys, here's what's going on. And we'll both learn something.

Seth: Yeah. I know. I love it when that stuff happens.

Actually, I should probably have a conversation with my friends at AcreTrader because they probably deal with a lot more of this macroeconomic stuff in terms of, you know, farmland markets as a whole and all this stuff.

But I totally appreciate your insight into where you're coming from as just kind of like the hands-on, down-to-earth, like you're dealing directly with people buying individual farms like this.

But I'm wondering, again, if you don't know the answers to any of this stuff, no worries. I'm just trying to pull out anything you might be confident about.

Pat: It's not just us. It's not like we're the only two, forgive me, only two dummies out here that don't understand how the economics of it work.

I've got a pretty good client we have sold some farms to over the last decade and a half. He lives up in your part of the world. He doesn't buy farms up there. He buys them down here because he can make the numbers work better. This conversation I've had with him multiple times.

He owns farms in three states down here, and some of them substantial farms, large farms. He doesn't buy them up there. He buys them down here. He's a long way away. He gets good operators and he does very well, but he's also scratching his head and he lives up there. He prefers our economics a lot better than the economics in the Midwest.

Seth: Well, that's a great point. I mean, there's really no reason why you couldn't do that as a farmland investor: buy land in some other state that you never really see. You just need to know that the fundamentals make sense and that it's a good piece of farm ground and you can find a good farmer to lease it from you and that kind of thing.

It leads me to another question I've got. So just like any land investment, there are different hot button issues that can kind of make a big difference in terms of whether or not a farmland investment is good or bad based on the geography and what different factors might affect it.

For example, like wetlands and flood zones and soil types and all this stuff. So this varies a lot depending on what state you're working in. For example, if I'm trying to buy a piece of farmland in Louisiana and I've never been to that area, how important is it that I personally go and physically inspect that property myself? Or what kind of tests or due diligence should I make sure I'm doing to make sure this is a good piece of land that I'm not buying something that's going to be really difficult to make money from in the future?

Pat: That's a heck of a good question. That comes into play a lot of what we do. I'm thinking of a little small farm I sold for a gentleman several years ago, but the guy in California, he's an IT guy. He's never done that his whole life. He never leaves the screen.

He bought it as an investment. And he asked me just for a checklist of things. “Hey, Pat, what do I need to make sure, what boxes do I need to check, due diligence-wise to check this farm out? Because I'm not going to fly out there and look at it. I don't know what I'm looking at if I do, but what do I need to do?”

And I gave him several things to look at. And as the farm size increases, this list will get a little bigger and we'll get a little more involved. But I said, hey man, just look at the soils and of course the soil types are easy to determine. In our CS we can do it right now on the internet. We need to make sure that the wells are operational, all the irrigation pieces, the risers and all of that, any reservoir capture areas, all the irrigation is in good shape. We need to make sure there's decent infrastructure in place for the market. The crops have to go somewhere and have to go there in an efficient manner.

Is there a good base for tenants? Sure, you've always got somebody clamoring to lease it from you today, but is he a good long-term guy? Or if he goes away, something happens and do I have people in line that I can easily rent my farm to going forward?

The soils, the wells, the infrastructure are huge deals. Knowing that they can rent it out and what those kind of area rental rates are, knowing those things are very important.

If it's a larger farm, you're going to find people who are going to have environmental studies done to make sure that there's no chemical seepage, massive fuel spills, anything eroding into creeks, streams, and rivers to cause them any environmental issues.

Phase one environmental studies are getting pretty common these days, to make sure at least that's done. Nobody wants to spend $4 million on a farm to buy somebody else's environmental issue. That's become kind of the top of the list for a lot of buyers to make sure that there are no environmental issues, problems in place.

Irrigation systems, if it's an aboveground irrigate, you know, pivot systems, those things are becoming less and less desirable in our world. People want to get away from the pivots and use underground systems or polypipe, aboveground, movable irrigation structure.

Those are just a handful of big items right there.

Seth: When you mentioned soil types, I don't know if you know this granular level of information, but what kind of soil type do you want to see and what do you not want to see? What's a problem when you go to the USDA soil maps and see what's there on the property?

Pat: You know, there are a lot of people who know a lot more about soils than I do. I use the data and I use it routinely when I'm looking at farm ground.

And also, you know, a big part of our business is timberland. I use the same NRCS website to look at site index for here in our part of the world, loblolly pine. Same data. It's just a different crop, you know, pine tree versus soybeans, corn or milo, that kind of deal.

Soils are called different things in different places. Class one soils in your world are going to have a different name than class one, class two soils in my world. You start learning those names of those different soil types and what to look for. So I couldn't throw out any names because they're going to be different with every one of your listeners in different places.

But typically you want to learn the good silty loams versus the heavy clays. You want to know the difference in those because that matters based on the type of crop that is the predominant crop in that area or the mainstay that somebody that's going to be farming your place is going to be growing.

Here in our part of the world, we've got here in northeast Louisiana, specifically up and down along the river, we've got some real heavy clays. And those heavy clays are tough sometimes when it comes to irrigation.

Seth: Is it because it doesn't drain well. Is that the problem?

Pat: Exactly. Yeah. Then we've got the silty, loamy type soils are what most guys are looking for because they do drain well.

So learning the names of the soils for the silty loams and the heavy clays in your area is what's important in my mind.

Seth: Well, as you were talking there, Pat, I just asked ChatGPT, the ultimate authority of all truth, what kind of soil types farmers would or wouldn't want to see. And it basically just matched what you said. Said good soils for farming would be loam, sandy loam, silt loam. And the worst soil types would be like heavy clay, sandy soil, and rocky soil. So I don't know, whatever that's worth.

Pat: The rocky soil, yeah. See, that's something that here in our part of the world never comes to mind.

But, you know, we sell a lot of land. We're licensed in Missouri. And, you know, in my mind, Missouri is all rock, you know. But, yeah, so that's a good point, rocky ground.

Seth: Do you ever see people who buy raw land? Maybe it's like a forest or something and they develop it into farmland? Does that ever happen? So, what does that cost per acre to do that? Any idea?

Pat: It's not going to be a one-size-fits-all, but it's going to be… I’ll give you an example.

I have a very good friend, lifetime friend in Arkansas. I'm in Louisiana. He's in Arkansas, South Arkansas. He's an hour and a half, two hours away. He buys these types of tracts and will go in and clear them. So he'll have all the timber cut and then he'll have it completely stumped. All the stumps removed, piled, burned. Then he'll go in and have it land formed and irrigated.

Now he can do a lot of his own work because he's got heavy equipment. He's got guys that can run it. So he's got some economies in place that your average bear doesn't have.

But ballpark and acre, he's looking at, you know, $1,000 an acre to get water on it. He's looking at $200 to $500 an acre to stump it, rake it, and burn it. And that's at his numbers. It's going to be a bit higher at ours.

So, ballpark, but using his example, it's $2,000 an acre is what it's going to take him plus the time. And so you got the cost of money, but without getting into that part of the equation, a couple thousand dollars an acre.

So, he's looking at, okay, if I do this improvement, I've got ground that's now worth 4,500 to 5,000 an acre. So if he can get in it for a couple of thousand an acre, let's say for round numbers, do that work, couple of thousand, he's got, for conversation, 4,000 an acre in it. He's got something that he can then farm himself—because they farm several thousand acres—a good irrigated piece of ground that he created himself for a little bit less than he could have bought it for.

But the problem is, you can't just go out. It's not on the shelf. You can't just go out and buy it, you know, in your footprint. So he had to go kind of make it. So he's created a valuable piece of ground for him for, say, five hundred to a thousand dollars an acre cheaper than he could have bought it for if he could have found it.

And it's where he wanted it because he chose the tract. It's in his footprint. He did the work. He made it work himself. And so he's kind of like a custom land developer for his own farm.

$2,000 an acre is his number. And that's him being able to shave costs or shave some money because he can do a lot of the work himself.

Seth: That's a great example. I had had this conversation with a farmland broker about five years ago, and he told me very similar numbers to that.

But to your point, the question I asked you was like impossible to answer because there's so many different, like what if there's no trees on it? What if it's already perfectly flat? What if, you know, there's ravines and all this stuff? It just depends totally on that property.

And also it sounds like this guy had a really nice competitive advantage in that he could do a lot of work himself. I mean, that's, I would never be able to do that. So if I had to pay somebody else to do the exact same thing, I'd probably be paying, I don't know, I don't know if it's 3,000 bucks an acre or what it would be.

But it's a really interesting thing to think about because I know a lot of land flippers in our audience are always looking for new ways that they can add value to properties, whether it's subdividing them or putting some kind of improvement on it.

And this is something I don't think a lot of us have really thought about in terms of, what if I could buy a piece of land? And what if it costs me, say, $1,000 to convert this to farmland that I could then sell for four thousand dollars an acre? I mean, it would definitely be a very much more involved project and there would be a lot of costs up front to do that, but I haven't heard anybody who's done that and I'm sure there's opportunity like that out there.

Pat: It's a very niche thing to do because the capital outlay for to do that is huge. We're talking about, even at my buddy's number, a couple thousand bucks an acre, that's real money. And over time, it's a good while before he starts getting any returns.

So he's got his neck out there until he gets this thing, a crop on it and starts getting a little bit of return. But they're third generational farmers. They know what they're doing. It's not their first rodeo, you know, so it's a lot less risk when you know what you're doing and you've done it in the past and you've kind of been there, done that. It takes some of the sting out of the risk.

They also (in our part of the country, this doesn't work everywhere), use the example of it's got trees on it. They also buy catfish pond, ground that's been in catfish ponds, and just convert the ponds back into tillable acres.

That's the same scenario, but just a bird of a different color, so to speak. Instead of taking down trees, you're taking down levees and forming the ground for irrigation based on that. So that's popular down here too, but it's hard to find those tracts. But when you can find them, they really make some pretty good farms.

Seth: Do you know what is a normal financial yield? Not crop yield, but like… What kind of ROI should a person reasonably expect if they invest in a piece of farmland? Like, is it 3% or 5%?

And I know this, again, this depends totally on the person and all this stuff. But if you were to buy a piece of farmland, what kind of yield would you want to see to say, yes, this is a good deal?

Pat: What I would want to see, I guess, is, of course, I'd want to see double digits. You know, OK, great. Fine. Knock yourself out. You go buy all those up you can.

But in the real world, to use my Midwest guy who buys farms down here in the Delta, and he's a heavy hitter. Now, he doesn't buy 10s and 20s. He buys several hundred, several thousand acre-big farms, multiple farms. He has to have, if it's not 3.5, he won't even entertain it.

So he's 3.5 and up. 3.5 to 5.5 is his sweet spot. If he can find something over five and a half sign him up as quick as he can because he understands that it's just difficult to buy an established farm that's ready to go day one that he can get an operator on immediately. Four and five percent he's in there all day long sign him up.

I'm sure that you've got some listeners that they've got some spots and places you know they may be in the six, seven percent. That's great. That's a strong return for farm ground because that's an ROI on the ground.

But then you've also got the asset that's appreciating right now, at least pretty rapidly. So you're doing well on two sides of the of the equation, assets appreciating and you're getting, you know, ROI for your cash.

To answer your question. 4% or 5% is kind of where most folks want to be from my experience in our part of the world.

Seth: It's really good to know because just so people kind of understand what they're signing up for, what they're chasing after if they try to buy a piece of farmland, that's kind of the average or the normal range of what some people go after.

And when I hear that, it doesn't get me terribly excited. That's not a huge yield. But to your point, the appreciation is there. It's a very easy investment. It doesn't require a whole lot of effort for the landowner to do anything, provided they have a good tenant who will lease it up again and again.

So is that mainly is the fact that there is some return on it? Maybe not huge, but there's something, but also just the ease of it.

And then also the appreciation of those kind of the reasons why people do this instead of investing in, say, a hotel or a self-storage facility. Like why go after farmland when there's stuff that makes more money out there?

Pat: Yeah. Tomato, tomato. Everybody's got looks at it differently. They may call the same thing. I don't know. Everybody's just different.

Also, to the stage of your life. You know, if you got a guy that's like my buddy, I keep talking about in the Midwest, you know, he's in his late 60s. Heck, he may be in his early 70s now. He doesn't want a high-risk situation. He He wants steady, dependable, rock solid, a reasonably easy asset to handle estate-wise, you know, because, I mean, he's in the fourth quarter.

You know, you probably have some buddies, maybe some, you know, I've got some investment friends that, you know, hey, it's early in the first quarter for them, early second quarter in life. You know, they're wide open. They got a lot of time to correct some mistakes if they mess up.

So it probably just has to do with season of life, ease of investment. If you're dealing with a real turnkey developed farm down here in the Delta or probably just about anywhere, you're dealing with the tenant a couple of times a year. You may talk to him a few times just to check on things. You get a check from him once or twice a year. You get a certificate of insurance, additional insured from him once a year.

You know, the management of something like that is just a few minutes of your time versus a multi residential, a multi resident unit, a hotel, a commercial building. That's every day, all day, nonstop, late at night, 2 a.m., you know, toilet overflow. You've got so many different things going on.

And you just, you got folks that just don't want that hassle. They've got cash. They park it in a good asset. They get the return they're anticipating. The money's in the bank. The details are taken care of. No muss, no fuss. It's just easy. And the risk is tiny.

Seth: Now, you mentioned that farmland is appreciating right now. So why is that? What all affects farmland values? Is it like commodity prices? I've heard in my conversations with different farmland experts that like, it's not really tied to the housing market at all. Housing values can be plummeting while farmland values are going way up. So, what is causing that?

Pat: Demand. You have something that's happened. And again, I'm 59 years old. I haven't seen everything. I don't know everything. My understanding is based on my history and time.

We've had so much foreign investment that's come into farmland and funds. There are a lot of, I've sold farms to large funds that go out and they make these big purchases and they drive the demand.

You know, the supply gets a little tighter because you've got foreign investors or you've got big funds that are buying up massive chunks. And so your demand is there, but the supply is almost finite, it's limited. And so that's going to drive the prices up.

Commodity prices drive the prices up, but that's a double-edged sword. My buddy and I were talking yesterday. One of my agents is a farmer. Commodity prices are just kind of are what they are today versus the last number of years. We've seen prices go up, but we haven't seen the commodity prices just racing out of sight. So that's a head scratcher. But that does drive it, commodity prices.

I guess, like I said, the outside demand and the commodity prices and the limited supply, and I say limited supply because you and I both talked about just a few minutes ago, we wonder, are tillable acres increasing or decreasing? I personally think they may be decreasing a little bit. So that supply is pretty flat or maybe even decreasing, in my opinion. It could be going up, but it's not a massive supply of farm ground.

So that's all got to factor into it.

Seth: If I've got like $50,000 and I want to buy a piece of farmland just to get my feet wet, is that enough money? What is the smallest piece of farmland I could get with financing from a bank and it would still make sense? Is that small of a parcel even exist out there? Are there 10-acre parcels of farmland or is 40 the minimum? How much cash would I need? How small would a parcel need to be before I could really feasibly get that thing?

Pat: I would get a lot of pushback from your folks because everybody's got a different strategy and different perspective, and I respect that.

But from my point of view, an investor buying farm ground in this day and time doesn't want to use a lender. And just think about right now, if you went and bought a piece of ground, you bought a farm, just what the interest would be just with the banks you use, what's the interest rates?

And you look at your return and you're going, golly, my return might not service the note. It might not, depending on your mathematics there and depending on how much cash you put into it.

So I would think it would need to be a cash investor who's buying an asset that they're going to just lease out and not own or operate. And so with that in mind, it's got to be a straight-up cash deal to find a good tenant in our part of the world.

Yeah. 40-acre farms, people lease them all the time, but it's got to be in a good spot. It's got to be in a footprint that there are a lot of good operators so that you can always keep those 40 acres rented.

Because 40 is small, especially if you're wanting to irrigate it. You know, 40 acres is a pretty small tract of ground to irrigate. There are a lot of them out there. Don't get me wrong. They're out there.

But sometimes economics get out of whack on a small piece because the cost is the cost and you don't have as many acres to spread it across. I go put down a well, it's a flat fee. I mean, it's a number, one well to service 40 acres. I can't put down a half a well or a quarter of a well. I got to put down THE well and I could put down that same well and maybe service 120 acres, 200 acres, just depending. So I can spread that cost out over more acres. And that makes sense to you and all your listeners.

But if it's a small piece, it's got to be in a great footprint because it's hard for a good operator who's 45 minutes away to put equipment on the road and employees on the road to go and work a 40-acre tract somewhere because you lost a tenant and you got to lease it to this other guy.

So you got to have people all around those smaller tracts to keep it leased out. Does that make sense?

Seth: Oh, for sure.

Pat: If it's a large farm, it's a lot easier, but a small farm is tougher.

Seth: And that was one of those kind of light bulb moments I had. It's actually like a very obvious thing you're saying here, but it just never occurred to me until we talked about this last time when you mentioned location matters in terms of, there's got to be sort of an existing farmer economy in that area. Don't just develop a 40-acre piece of farmland, you know, a hundred miles from the nearest farm. Like, it's going to be a lot harder for you that that way.

Pat: I'll tell you how I learned that, Seth. I don't mean to interrupt you, but I'll tell you how I learned that. It's not like I came into this with all this knowledge and information.

I was helping a Louisiana guy who is a farmer and an investor and a real estate agent, a land agent. Helping him look at a farm probably five hours away from us in north central Arkansas. And it was a great price and it was a beautiful farm. I mean, it was all there. And you just pluck it out. You look at that farm. You go, oh, wow, this is great. What a deal.

But the more we dug into it. And again, I'm listening to him a lot because he is the farmer. He is the guy. He's going, “I can't farm this. This is six hours from my operation. I've got to find tenants up here.”

And then we started looking at the market around it, the infrastructure around it. Just to haul the grain to elevators was a long, long way. There were very few large farmers in the area that he could lease to.

We ended up passing on the deal. The numbers were really good, and he passed on it. And he's an aggressive buyer, but he passed on it because there was a limited number of tenants available.

And the infrastructure in that greater area around that farm was so insignificant that he's saying, man, I'd have to buy it for $1,000 an acre, less than what they're asking, feasibly make it work. And that's when I realized, wow, just because it's a beautiful farm, it seems like it has everything.

These are two big factors that made the difference for this guy. And he is a pro. I've sold him lots of ground. And so that started getting my attention when I saw him react that way. And I'm going, those are important factors. You take that same farm, you pluck it out, and you come put it anywhere in my part of the world down here, 5,000, 6,000 an acre.

But up there, he passed on it for a lot less money just because he couldn't make it work.

Seth: So this idea of buying a piece of farmland that's not irrigated and then irrigating it. And just by doing that, it makes the property's value go up significantly ecause now it's irrigated and the farmer can kind of have more of a guarantee that their crop is actually going to turn out well.

So it almost kind of reminds me of flipping a house where you buy something that's worth less, you make an improvement and it's very clearly worth more as a result of that. Maybe you wonder, like, how does that work in terms of like, what does it cost to buy, use this 40-acre example that's not irrigated and then, drill the well, add the irrigation equipment.

I don't know if you have any examples in Louisiana there, just in terms of the cost of that. Like I know to drill a well in Texas would probably be a lot more than it would be in Louisiana, for example. But just think and do that kind of project on paper. Like if I wanted to buy a parcel of farmland, add the irrigation, sell it for more. Does that ever make sense? Like do the numbers work out?

Pat: Oh, absolutely. Yeah, absolutely. One little point to add in, since we're talking about irrigation specifically, again, you'll have folks that will go, hey, I know I know a different exception.

Many, I don't want to use the word most because I don't know, but I do know many lenders whose business is crop loans for farmers, for operators. They're requiring the ground to be irrigated to loan on it because they know that it greatly protects their investment. You get a better chance of a better yield on irrigated ground.

And so a lot of lenders are going, “Hey, if it's not irrigated, we're not going to be able to help you on your crop loan like we used to or like we've done in the past.”

So irrigation is getting more and more important other than just making sure my corn is getting the proper inches of, you know, moisture every year.

But to answer your question, yeah. Just ballpark, we put a well down, you know, there's 10,000 right there. And then you've got the infrastructure. If you've got underground piping. Again, all that's going to depend on the distance and the degree of work.

Most farmers down in our part of the world now are using risers with polypipe because poly pipe has gotten so easy to use. It's pretty inexpensive. Polypipe, you know what I mean? And I'm sure your readers do or your listeners do, too.

Seth: Why don't you tell us what that is, just in case we don't know what that is.

Pat: Polypipe is a 12 inch diameter white plastic tubes you've seen laying on the ground.

Seth: PVC?

Pat: Yeah, that's poly pipe and it's hooked up to risers. Risers are a solid piece that come out of the ground that the well pushes water through pipes to the riser. It's called a riser because it rises out of ground, hook the poly pipe to it, water fills the pipe and they lay that pipe down out along the row.

So it runs down the row furrows and then they'll pierce the pipe. It doesn't come with holes in it. It's a solid piece. but you just go in and puncture it in each furrow and to let the water out and it runs down the rows. It’s a really easy, efficient way to water these days. Anyway, you got the well, 10,000, you got your infrastructure of the underground piping, the risers.

That's one thing, but the major cost outside the well, is you've got to make sure your ground is to grade so that that the water will run the rate you want it to run, the direction you want it to run. Because if the ground's not properly leveled and set to grade, it will flow a certain direction at a certain pace, then it really becomes useless.

And a lot of people don't think about it. I'll put a well down. Well, yeah, but that ground is all like this and crazy. You know, it's got to be leveled. And we use the word “level,” but the ground's not level. It's set to grade. It's actually at an angle, very small angle, but set to a grade.

And the cost of that runs the gamut depending on how much work it takes to cut that ground down, to grade. There's some ground it's easy to cut because it's just gently rolling. They don't have to cut much and it's already sort of rolling the direction that makes sense for the shape of the tract.

So cutting it to grade can be very expensive. It can be several hundred dollars an acre, no matter what, but it can really get more substantial depending depending on how much it takes to put that property to grade.

So each one of them is going to be different, but you're looking at, again, I use my Arkansas buddy as an example. He roughly says, hey, if I buy a piece of ground to get water on, it's going to cost me anywhere from $1,000 to $1,500 an acre. Just sort of his rule of thumb in his universe.

Seth: Is there like an industry professional, like if I'm trying to do a Google search for whoever can help me figure out what those costs are going to be, is there like a certain type of contractor that does all of that? Or do I have to contact one person for the irrigation equipment and then find an excavator who can move the earth around?

How do I figure out and put those numbers together to figure out the real cost for that?

Pat: Typically, you got two different folks there. You got your irrigation people and then you've got your dirt guys.

And there are companies out there that landform and will cut a piece of property to grade. And it's just, I don't know how to tell you who to use anywhere. I mean, I know who I'd use down here because I'm local. But it's just going to be finding those people online.

It's going to be very easy. Somebody's in a farming community. There's going to be a handful of irrigation companies. They're a farming universe. They're probably going to know irrigation companies just by name, even if they've never used them. They've heard of this company, that company, because they, you know, they're the ones that put down wells and not just for farm ground. They put down wells for WRP, you know, for duck impoundments, for catfish ponds. They put down wells for ruled home sites. They're the company that does it. So they're the easy guys to find.

And then you've got to shop around just a little bit for the landformers.

Seth: Awesome. Pat, thanks so much. I'm very grateful to have the chance to talk to you about this stuff.

If people want to learn more about you or check out farmland properties you've got for sale, what's the best place to go for that?

Pat: RecLand.net is our main website.

And of course, I'm easy to find on social media. Don't look for Pat Porter. You won't find much of that. But if you search RecLand, RecLand Realty, or RecLand Talks on any of the social platforms, you'll find us. But RecLand.net is our main site.

Seth: I'll be sure to include links to all that stuff in the show notes for retipster.com/182.

Pat: Back in episode 153 that we did, you put a link in there that if any of your listeners wanted to email me for a copy of one of my books. And I had really a ton of responses. People email and ask questions. I sent them there. Be glad to do that again for your listeners. You got a great audience out there.

So it doesn't cost anything. There's no tricks, gimmicks. You don't get put on a mailing list. You just simply email me at office@recland.net. Ask for one of our land books and be sure to put your address in there. I'm not a mind reader.

Seth, if you want to put that in your show notes, I'd be glad to honor that again. I'm happy to take care of your people.

Seth: You bet. office@recland.net. I'll include that in the show notes as well. Again, retipster.com/182.

And again, thanks a lot, Pat. It's great to know you. Great to talk to you about this stuff. and hopefully we can talk again soon.

Pat: Seth, my pleasure, buddy. Take care, man.