Determining the value of a real estate investment can be a challenge, especially when it comes to farmland. Comparable sales, opportunity costs and price per acre are all good benchmarks to factor into a land purchase.
Another important consideration is the land’s potential rate of return, also known as the capitalization rate. This is where the cap rate calculator designed by a team of our summer interns can be helpful. Three required figures – purchase price, cash rent and property taxes – deliver information for better buying decisions.
“I am really proud of the work the interns did this summer on the cap rate calculator,” said Ryan Wittler, the business development associate who served as an advisor during the project. “We were able to bring on a group of interns to directly impact the products and services that customers use.”
Intern Alyssa Buis said it was rewarding to develop a calculator that can help investors make important decisions. The interns worked alongside financial and development experts and conducted interviews to gain insights into user needs.
“We could ask seemingly one question in about 20 different ways to come with a design that had the best chance of being successful,” Sydney Andreasen, an intern involved in the development of the calculator wrote in a blog tracking the group’s progress and learning experiences.
In the end, Buis said, the group determined a streamlined calculator provided the best user experience. The three required fields delivered the same accuracy as designs requiring additional information and time.
Each year, Farm Credit Services of America hosts an internship program for college students pursuing careers in a variety of areas including agriculture, lending, credit, risk management and technology. “It is rewarding and engaging experience,” says Carl Horne, vice president of digital tools and products, including FarmLend. Here, some of our 2021 interns demonstrate their cap rate calculator and discuss what they learned during the development process.
Investors can use the calculator to evaluate the expected annual earnings -- or income stream – generated by a single parcel or to compare multiple tracts of land. It also gives investors a sense of long it will take to recapture their initial investment.
“The cap rate calculator is a useful tool as it allows a potential buyer to quickly get an estimate of the projected cash flow of the farmland and how this compares to similar farmland in the area,” said Nathan Jensen, FCSAmerica’s regional vice president for business development in Sioux Falls, South Dakota.
Farm real estate cap rates typically range between 2% and 6% and can vary based on factors affecting valuation of a property, including its location and overall market value.
Estimating the value of farmland doesn’t have to be a guessing game. The cap rate calculator on FarmLend is a valuable decision-making tool.
Four Reasons to Calculate Your Cap Rate
- Cap rate is a quick and easy method to determine if a property is immediately profitable by comparing it ability to generate income against the purchase price.
- It allows you to compare investment properties at their current state. This can be helpful if you are looking to buy different tracts of farmland in the same area or around the same price.
- You can start to estimate the payback period of your investment or the time it will take to recover your capital outflow.
- Finally, because cap rate reflects a snapshot in time of an asset’s return, you can focus on the value of the property alone without the distraction of other factors impacting your investment.
