Pros and Cons of Buying Land in Iowa

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Pros and Cons of Buying Land in Iowa

Buying land in Iowa can be an attractive investment opportunity, given the state's rich agricultural heritage and the increasing value of farmland. According to the United States Department of Agriculture's (USDA) Land Values 2022 Summary, Iowa's farm real estate value averaged $9,400 per acre in 2022, a 17.5% increase from the previous year and the highest in the nation. Additionally, Iowa's pasture value averaged $3,800 per acre, a 15.2% increase from 2021. However, before making a decision to invest in Iowa land, it is essential to carefully consider the pros and cons of such an investment, taking into account factors such as location, soil quality, market trends, and personal financial goals.

Iowa has a humid continental climate, with hot summers and harsh, cold winters. The state is known for extremes – scorching heat in the summer followed by bitter cold and heavy snowfall in the winter. Iowa's economy is heavily agriculturally based, with over 86,000 farms located in the state and agriculture contributing significantly to GDP. The state is a leading producer of corn, soybeans, pork and eggs. 

Outside of agriculture, other major Iowa industries include advanced manufacturing, biotechnology and finance/insurance. The cost of living is low compared to national averages, especially housing costs. Iowa's landscape is predominantly flat plains, with some low rolling hills. There are a few urban centers like Des Moines and Cedar Rapids, but much of the state retains a rural character.

Pros of Buying Land in Iowa

There are many advantages that come with investing in Iowa land. Some key pros include:

Strong Agricultural Economy and Land Values

As an agricultural state, Iowa has a strong farming economy. With rich, fertile soil and massive amounts of acreage dedicated to row crops like corn and soy, agriculture drives land valuations in the state. Even with some variability from year to year, the long-term trend for farmland values in Iowa is upward. The value of Iowa's farmland has outperformed the S&P 500 over the past 20 years.

Healthy Cash Rents for Leased Land

Much of Iowa's farmland is leased out to farmers rather than owner-operated. Cash rent rates provide good returns for landowners who do not wish to farm the land themselves. Average cash rent in Iowa ranges from about $260-270 per acre for prime cropland. With strong commodity prices in recent years, cash rents have been stable and avoided drastic moves downward even in tougher farm economy years impacting incomes.

Tax Advantages

Iowa offers some tax advantages for land owners related to agricultural land holdings and land passing between generations. Gifted or inherited farmland can receive favorable tax treatment that minimizes the estate/inheritance tax liability. Additionally, agricultural land is assessed differently for property taxes versus other types of real estate.

Greater Availability of Land for Sale

While still competitive, some Midwest states have seen greater percentages of farmland locked up in heir/legacy or institutional ownership. About half of Iowa farmland changes hands every 25 years, keeping active farmland markets. There is strong turnover and availability of land for those looking to purchase compared to neighbors.

Recreational Usage Opportunities

In addition to cultivated farmland, those purchasing acreage in Iowa may find opportunities for outdoor recreational activities. Over 1/3 of Iowa's land base is taken up by woodlands, wetlands, rivers, and lakes. Buyers can secure land not just for agriculture but also personal recreation, like hunting, fishing, hiking etc.

Cons of Buying Land in Iowa

However, purchasing Iowa land also comes with downsides and risks to consider. The top cons include:

Volatility and Risks for Cropland Values

The value of Iowa’s prime cropland can fluctuate substantially from year to year. While the 10-year trend may be positive overall, land valuations are closely tied to commodity prices and farm profitability. Downturns in the agricultural economy can lead to large drops in Iowa cropland prices. There is risk involved, as land bought at peak prices may decline notably in value.

Complex Process for Out-of-State Buyers

Navigating the land buying process in Iowa poses particular challenges for out-of-state buyers unfamiliar with laws/regulations and lacking local connections. Most land sales happen privately before property is openly listed. This gives locals and seasoned buyers an advantage over absentee purchasers trying to buy remotely. There is a learning curve for newcomers.

Special Tax Rules Related to Gains on Sales

While Iowa offers some tax perks for gifted/inherited land between family, the rules flip for investors selling land potentially for a profit in a shorter timeframe. Gains on certain agricultural property in Iowa held less than 10 years could incur higher federal tax rates upon sale.

Ongoing Management Responsibilities

Absentee ownership of Iowa land still involves active oversight like field drainage tiles, soil conservation plans, lease/easement agreements etc. This is manageable but out-of-state owners have added hurdles monitoring tenants and land stewards from afar vs. those close by. Property management headaches grow if land is divided/sold piecemeal over time.

Susceptibility to Extreme Weather Events

Situated in America’s heartland and dependent on steady rains, Iowa agriculture production can suffer blows from droughts, floods, freezes, and storms. Buyers of land in the state are vulnerable to these unpredictable climate/weather events that impact annual crop yields and land productivity over the long run. Extreme weather introduces uncertainty for buyers.

Overview of the Iowa Land Purchase Process

For those still interested in acquiring Iowa land after weighing the pros and cons, what steps are involved with completing a purchase?

Determine Financing/Available Capital

Expect buyers to need about 20-30% for downpayment minimums on raw undeveloped land purchases in Iowa. With quality cropland selling for $10,000 - $15,000 per acre depending on region/soil quality, buyers must secure substantial capital needed for downpayments and closing costs.

Search Listings and Tour Prospects

Most Iowa land changes hands privately off-market, but buyers still can seek out publicly listed properties for sale as well as engage agents to look for unlisted deals. Virtual tours via drone/aerial imagery or in-person visits allow buyers to scout and evaluate parcels. Soil tests should be conducted on cropland tracts.

Make Offer and Negotiate Terms

Once prospective buyers identify properties of interest, they can submit purchase offers and negotiate pricing as well as terms around closing timetables, access, mineral rights etc. Many sellers prefer flexibility around delayed closing/possession or installments buyingolder generation sellers not yet ready to fully divest land assets.

Conduct Due Diligence

Before transaction paperwork is finalized, buyers will go through due diligence reviewing title work, getting survey boundaries verified, confirming any easements present, and inspecting for any environmental/hazard issues potentially requiring mitigation.

Close and Take Possession

The last step involves applicant approval for financing if required, finalizing closing documents with title/escrow agents, wiring funds, and recording deed conveyance to transfer legal ownership. With papers signed securing the land rights, the buyer can now access and possess their new Iowa property.

While the process involves many steps, buyers are rewarded finding that perfect Iowa land investment aligned with their objectives whether row crop production, recreation, development, conservation etc. By knowing the pros/cons upfront and planning around key deal milestones, investors can navigate the roadblocks and smoothly complete their intended Iowa acreage purchases.

Final Thoughts

Purchasing land in Iowa offers investors plenty of advantages thanks to the state’s strong agricultural economy, average to above-average land values, healthy cash rental rates, and recreational attributes of acreage holdings. However, downsides like market volatility, complex regulations for out-of-state buyers, tax implications, management burdens, and weather risks also must be factored when evaluating potential land acquisitions in Iowa. Conducting due diligence around ag land values, cash rents, comps, and farm program benefits can help buyers make informed decisions weighing the pros and cons of buying farmland in the Hawkeye State. With proper planning and eyes wide open to both returns and responsibilities, investors can prosper adding Iowa land to their portfolios.

Frequently Asked Questions (FAQs)

What returns can I expect buying Iowa farmland? 

Returns vary based on land purchase price, cash rent yields, and market value changes over time. In 2020, average cash rent was $260 per acre and 5-year average land value change was 6.3% annual appreciation.

What crops are mainly grown on Iowa land I could buy? 

The top crops grown on Iowa cropland are corn and soybeans, which account for over 75% of planted acreage in the state. Small grains like oats and wheat make up less than 10%.

Can I deduct property taxes on land purchased in Iowa? 

Yes, property taxes on Iowa land qualify as tax deductions on Schedule A for land generating crop rental income. Property taxes range 1-2% of land value annually.

Is purchased land in Iowa eligible for USDA programs? 

Most Iowa cropland qualifies for federal agriculture programs like crop insurance and disaster relief funding based on weather-related losses. Subsidies may change but disaster help has continued.

What are closing costs on a $1 million Iowa land purchase? 

Estimated closing costs on a $1 million Iowa land buy are around $30,000, including land transfer taxes, attorney fees, and title insurance. Exact costs depend on deal terms.

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