I think I may have seen something like this on here once, but can't really recall.

What are the economics of buying a ranch in Texas?


I randomly found this place to toss out as an example.

http://www.davisvernon.com/bin/web/real_estate/AR212138/LOTS_AND_LAND/1267129580.html?ZKEY=&acnt=AR212138&action=LOTS_AND_LAND&inwindow=&hs_action=VIEW_DETAIL&listing_id=REATOP49789133&start=0&grp=ALL

Baylor County:
4000 acres range land.
300 acres crop land.

Price is $5.2MM

Assuming financing for 30 years at 6%. The annual payments would be $390,000.

Just how would someone cover that payment each year?

Income from:
cattle?
hunting?
crops?
minerals?
other?

what else?
assuming it appreciates at 2.5% a year, that's ~$130k.

I do not know much about ranching and farming, but all the research I have done, you cannot cover your annual cost by buying land. It has to be suplemented by another source.

Remember you are buying an asset as well. I try to relate it to stock. You get a $50 loan and buy a share of stock for $50. You own an asset worth $50. You will also make income off that share in dividends. That income will not be enough to pay back your loan of $50. However, you have an investment and a source of income that you can sell.

With farm lands as high as they are, I do not see how anyone can go out an buy land and rent/own equipment to start farming (make a living). I may be wrong.

Key is inheriting land. Cheap start-up costs.

I would love to have someone show me as well how it is possible.

quote:

---

I do not know much about ranching and farming, but all the research I have done, you cannot cover your annual cost by buying land. It has to be suplemented by another source.

---

I totally agree. The question I'm trying to understand, is how much of a "supplement" is required.

I'm hoping someone has the insight to put some numbers to the revenue items I mentioned.

The best way as stated earlier is inheriting and/or already have the money to do the deal. Trying to get that much land and support it with farming and ranching only is tough to do. I'm glad I don't have to. I run some cattle, but it is definitely on the side and would not want to try and make a living from it.

The key to making enough ag income to pay off the land note is buying highly productive land at a cheap price with low-cost financing.

It is nearly impossible if you didn't buy your land 5+ years ago while interest rates were reasonable and the run-up in rural land values had yet to occur in some places. Maybe if the stock market starts off and the rest of the economy makes land a less attractive investment the prices may come down again. Either that, or inflation makes the payments more reasonable.

I made it work but I already had cows and other lease pastures. Add a cow note onto that and you're in a pretty good hole.

You could lease the grazing for about $10/acre. You could probably lease the hunting for $7/acre. That's $17/acre annually.

You'd make about $73,000 per year.

Most lenders won't lend over 80% of the value of the land... unless the land is selling under market prices and/or you have an extra million dollars laying around, the financing ain't happening.

And I would definitely get the one that has income from minerals. hahaha

I've sold a cattle management software program to ranchers in all 50 states and throughout the world. In my experience, very few ranches are truly profitable from cattle alone. Those that are profitable from cattle minimize supplemental feeding, lease or otherwise have no land payments, minimize equipment purchases, and market their cattle aggressively. A lot of work that can conflict with the lifestyle of Ford King Ranch trucks and aluminum trailers. Most ranches I see depend on non-farming sources of income (retirement, oil & gas, spouse's job, occasional land sales, hunting income, etc).

I believe that land is a good investment, however, it's big drawback is that you won't realize the appreciation until you sell it. It seems like a long term investment, particularly if you aren't at the edge of a growing city.

For anyone interested, the Texas & Southwestern Cattle Raisers is having School for Successful Ranching in Ft Worth in a few weeks. If you are interested, check out http://www.texascattleraisers.org/convention/school.html. They will tracks for cattle and wildlife. If anyone is going to the show, stop by my booth (CattleMax) and visit.

We farm 2 sections in the panhandle (Sunray) run cattle on another and the wife and I still keep our 7:30-6:00 M-F jobs. The land up north is part of my wife's family land. We have been doing this for dang near 5 years and the returns are modest at best but it is a passion of mine therefore it makes it worth it. Plus the pheasant hunting is excellent.

For land, if you can cover your taxes and the interest on your loan you are doing pretty good. Keep in mind too that you will get some enjoyment from it as well and that is worth something.

So how many cows do you guys think a place like this would run? (if you look at the pics, you'll see the grass is pretty sparse)

I have a difficult time believing that every place like this, is being bought by someone with ~$300,000 of spare income to put toward the note each year. Are there really that many affluent "leisure buyers" out there?

quote:

---

chris1515
posted 9:55p, 03/07/10



So how many cows do you guys think a place like this would run? (if you look at the pics, you'll see the grass is pretty sparse)

I have a difficult time believing that every place like this, is being bought by someone with ~$300,000 of spare income to put toward the note each year. Are there really that many affluent "leisure buyers" out there?

---

You may find it hard to believe and I used to but this is precisely what's happening. It might not be just one person though. Say you get 4 parties together and they incorporate to buy the land, you've just dropped it from ~$400K/yr to $100K/yr and that's not uncommon at all.

Your also assuming everyone buying needs financing. When you have no note payment, running cattle to lessen the tax burden each year really helps to lower the overall overhead. When you add in selling hay and other cash flows, you can break even on the tax front.

[This message has been edited by nnichols (edited 3/7/2010 10:45p).]

It's been pretty overgrazed.

As I understand it, when buying large amounts of ranch land, you can depreciate various things like fences and ranch buildings.

From what I've heard, the effect on taxes can pay for a large portion of the land. I suspect that the tax stance in this approach is very aggressive and could come back at you if not careful.

quote:

---

the effect on taxes can pay for a large portion of the land

---

Can you give us a list of the top five?

I would say after you have made your outlay for your new ranch that you are able to recover a portion of the "money you are now spending" on barns, fences, clearing etc...

This isn't a ranchette outside Austin.

Fighting the county to get an ag exemption isn't necessary. The taxes aren't going to change with cattle. The discussion of taxes is irrelevant and incorrect.

The economics are simple. Bad.

quote:

---

I would say after you have made your outlay for your new ranch that you are able to recover a portion of the "money you are now spending" on barns, fences, clearing etc...

---

If you can value your fences enough and depreciate them over whatever time is permitted, especially an accelerated deprecation, it could make an enormous difference in paying for the property.

My guess is that for it to be effective, you have to have enough income elsewhere for the depreciation to be covered. Someone buying a ranch wouldn't likely get much help, but a big ranch operator buying more land, might get an enormous boost.

By the way, a certain well-known author from the Texas Panhandle owned a ranch somewhere between Perryton and Pampa. I think it was on, or near, the Canadian River. From what I understand, he put his ranch on the market at a price far above what he thought anyone would pay for it and was surprised when another big farm/ranch owner in the area jumped in and bought it. My impression was that his offer was for full price.

For most people posting on TexAgs, your price per pound for live cattle has hardly changed at all in your entire lifetime!

Now compare that to the changes in costs for the rancher in fuel and equipment.

Fuel is a no-brainer that everyone knows about. 6-1/2 ft T-posts cost $1.99 in 1986. Now they are $3.99 or more.

quote:

---

If you can value your fences enough and depreciate them over whatever time is permitted, especially an accelerated deprecation, it could make an enormous difference in paying for the property

---

That's a pipe dream. If you go back to the OP the for sale price of the ranch is $5 mil plus. What kind of value could be placed on fencing for a typical ranch?

I would say less than one years interest on the note. Now where do you go?

quote:

---

Fighting the county to get an ag exemption isn't necessary. The taxes aren't going to change with cattle. The discussion of taxes is irrelevant and incorrect.

---

Don't confuse property taxes with income taxes.

I'm not a CPA, so take my free advice for what you paid for it.

Regarding income tax, you can depreciate the improvements on the land, and you can deduct the interest you pay for the mortgage.

The rule of thumb that most folks use is that you can get away with depreciating 1/2 the purchase price, if there are enough fences, barns, pens, etc. etc. on the place.

Lots of folks accelerate or "expense" their depreciation into the first years. So if you put a low enough down payment, and expense as much of the depreciation as you can for the first few years, your cash flow can be very low.

Let's assume on this 5 million dollar place that there are 2.5 million in improvements. If you're in a 30% tax bracket, that could be $750,000 less you pay for the place over its lifetime. If you accelerate the depreciation, and get the tax savings in the first 2-3 years, your savings could easily equal the payments for the place, for the first couple of years.

[This message has been edited by CanyonAg77 (edited 3/8/2010 9:28a).]

There is a reason most ranchers have other jobs. Only the huge operations can run based only on the ranch itself - I have no idea what the break-even number of animals is, but I would imagine it's large in that area.

The ranch itself looks pretty rough, but maybe the pictures were taken last year when it was so dry. There is no grass in the pictures and it's moderately brushy. You're not going to be able to run very many cattle on it at all. It does have decent looking water, though, so that's a plus, and the pens look good.

I know nothing about hunting lease pricing or farming, so I can't say about those.

You will not get mineral rights unless there are no minerals. Even then, you're probably not going to get them.

On another note, is that kind of land really bringing $1200/ac? Craaap.

So....

Ranching is now a REALLY expensive, labor intensive HOBBY?

The Jeffersonian "agrarian society" may truly be dead.

Surely there has to be some inflation on land. We're gradually becoming more European in that respect: We'll have a wealthy landed class....and everybody else, simply because the once "unlimited supply" has now run out, and the investor class has discovered people really are afraid of not having access to land, so they'll pay a premium for it.

If you ask around, you'll find that being a farmer or rancher is primarily about managing debt. Your best friend and your worst enemy is the bank. You live the entire year on borrowed money hoping that you can sell your products (or make enough supplemental income through government subsidies, spouse's job, additional jobs, etc) to pay off your debt, or more likely at least the interest you owe on your debt. Some years you might make a good dent in the principal and gain some equity and others you might deplete your savings just to keep the wolves at bay. You'll likely deal in a lot of money, but most of it won't be yours.

Take my situation, for example:

In April 2008, I bought ~155 acres in Dickens County. I paid $56,000 and was able to finance the entire amount since the land appraised at a higher value. Total annual payments are approximately $8,200 for 10 years. The land has one large pasture of ~115 acres with about 75% mesquite coverage and one small pasture of ~40 acres that is farmable. The only improvement on the land was a well and the fences. There is a small earthen tank.

Before I purchased the land, I was leasing it for the cost of the property taxes each year. At that time, there was not a property tax exemption, so taxes were around $1,000 a year. Back in March 2005, I bought 12 cows at a cost of $9,600. I paid them off over three years (only paid interest the first year and then paid the interest and principle the next two years). I bought a bull out of pocket in February 2006 for $1,500.

When I purchased the land, I got the 1-d-1 exemption which reduced property taxes to ~$400 a year.

Ideally, I would sell calves each year for ~$5,000. Assuming I have no other costs (which is never true), I only recover ~60% of my expenditures.

In 2009, I had expenditures of ~$4,200 for feed, livestock trailer, utilities to run the well to water the cattle, etc.

That means I only recovered 40% of my expenditures.

Something that I have looked at is using the 40 acre pasture to plant hay. However, I do not own a tractor or any of the implements to do so. I could probably lease the pasture to a hay producer and cut down on my feed expenditures and add a little bit of income, but not much.

And, back to the tractor. A good used tractor with a loader capable of doing farm work is going to run between $12,000 and $20,000. Add those costs into what I'm already spending, and I'm no where near profitable.

In short, I do not believe it can be done without supplemental income or without already owning some of the land or equipment. You could probably lease quite a bit of it, but in order to make it all work, you've got to have a banker who believes in you and is willing to take a chance.

If you plant the smaller hay field, most people will give you a cut and bale 50/50 split. We have done it that way for 10+ years around our area and it works great. Lets us plant food plots but still have access to a hay supply.

I think you can depreciate the breeding livestock, too.

If you are in the right place, you can get some fairly decent money selling right of way for power lines.

I think it is about $1,000 per post hole around here, but that could be really old information.

quote:

---

Your best friend and your worst enemy is the bank.

---

Hopefully, multiple banks.

I know a couple who sold quite a bit of farm machinery to help pay off some debts. They deposited the money in their bank account and the bank declared a loan to be due at once and emptied out the entire account to pay the loan.

That really put them in a bind. Among other things, because of the bank's actions, the entire amount from the sale was classified as income and taxed accordingly. They ended up having to sell their home to pay off the income taxes they incurred by selling some machinery.

Id rather be broke than let a power company use my property as an easement.

quote:

---

Id rather be broke than let a power company use my property as an easement.

---

In most cases, they are going to get it anyway if they want it. But what you can do, but only if you know what you are doing, is make it as expensive to them as possible.

quote:

---

The rule of thumb that most folks use is that you can get away with depreciating 1/2 the purchase price, if there are enough fences, barns, pens, etc. etc. on the place.

Lots of folks accelerate or "expense" their depreciation into the first years. So if you put a low enough down payment, and expense as much of the depreciation as you can for the first few years, your cash flow can be very low.

---

That pretty well matches with what I hear around here.

In some cases, I think that the buyers are probably really pushing that rule of thumb.

We have explored the financial options of buying a big ranch (4000ac/5.2Mil) and then a small one (Todd's example). What about something in between? I'm sure there are MANY of us who dream of our own 500-1000 acres that we own strictly for recreational enjoyment. I would assume that in this case - you need to have a nice bit of cash up front, and a steady income to cover taxes, interest, costs associated with the land and your choice of recreation (hunting comes to mind).

Anyone have experience with this? Trying to think/save for the future. Would love to have a ballpark estimate of the kind of funds needed for purely recreational property.

Lostboy, it depends upon the area. The smaller of our places is ~600 and runs after taxes and feed and fertilizer etc ~50k/yr. PM me and ill get into the specifics with you.

[This message has been edited by nnichols (edited 3/8/2010 2:25p).]