How to Calculate the Cash Rent Equivalent (CRE) of a farm

Cash Rent Financing,Mortgage

If you’ve been renting the same ground for a while, you might recognize the time when your landowner is ready to sell. How do you know if you’re in the right financial position to make an offer? You can calculate the Cash Rent Equivalent (CRE) of the farm. This handy metric is quick to calculate and then we’ll discuss how you can leverage your relationship with your landowner to access financing on the best terms.

Cash Rent Equivalent

The Cash Rent Equivalent is the sum of your annual farm loan payments and your annual farmland taxes divided by total acres (not tillable).

Cash Rent Equivalent calculation - Tillable

As we all know, land costs much more than just the mortgage and taxes on it. Just like home ownership, ad hoc projects will arise, including water maintenance, tree trimming, and access widening. You’re going to want to make sure you have funds available outside of your annual farm CRE to address these issues as and when they come up.

Back to the Cash Rent Equivalent formula – a crucial component is understanding how much you’ll be paying per year in your mortgage. We have a couple of different tools to help with that.

If you already know how much you’re considering offering for the farm, you can use our farm mortgage calculator to estimate your annual farm payments (and remember, we offer mortgages that can be paid off monthly, quarterly, semi-annually, and annually). Make sure you use the full year payment to calculate farm CRE.

Once you’ve determined your mortgage payment, we can calculate Cash Rent Equivalent. Take a look at the table below:

Table showing the gross annual payment calculation on 200 acre farm with 20 year mortgage - Tillable

For example, take a 200 acre farm at $10,000/acre with a purchase price of $2,000,000.

Assuming a 65% LTV (Loan-to-Value ratio), you could sign a $1,300,000 mortgage.

A 20-year mortgage at a rate of 4.8% calculates to an annual payment of $102,554.

Assuming a $20/acre property tax payment, I can assume annual taxes to be $4,000.

To note: property taxes vary widely state by state and depending on the value of farmland. Speak with the seller about their current tax obligations and reach out to a tax assessor as needed.

To get to an annual payment on this farm of $106,554, or $532.77/acre. Let’s say the cash rent for this farm is $375/acre (if you borrow money to pay rent, include that financing charge when you compare rental and purchase rates). That’s more than a $150/acre increase in annual payments.

Keep in mind that your mortgage is likely not going to finance 100% of your purchase price. In our example above, the mortgage covers $1.3m of the $2m purchase price. That leaves $700,000 to be paid upfront, which is no small sum. If you don’t have that much cash readily available, there are a couple of different paths you could take:

  • If you’re a young farmer, USDA offers beginning farmer loans with higher LTV ratios
  • Borrow funds from family or friends
  • Work with the seller to finance the down payment if they’re willing

Thinking about buying a farm is a very exciting time in any farmer’s life. Planning through the finances, while less fun, is an important step in determining your operation’s future growth. As always, if you have any questions, feel free to give us a call at 872-246- 9087. 

Tags :
Share This :

Recent Posts

Subscribe To Our Newsletter

Stay up to date with the latest blog posts, offerings, and AFF news.