Gross Rent Is Not Return
A land lease return looks straightforward—collect rent, divide by what you paid. But that headline number hides every dollar that leaks out between the tenant’s check and your bank account. A 40-acre parcel leased for $4,800 a year on a $120,000 purchase looks like a 4 % gross yield. After property tax, liability insurance, a few months of vacancy between tenants, and a fence repair, the actual cash you keep might sit closer to 2.2 %. Knowing the difference before you sign a lease keeps you from overpaying for income land.
The most common mistake is treating gross rent as profit. Gross rent is revenue. Return is what remains after every holding expense clears. If you skip that distinction, your “passive income” parcel quietly underperforms a savings account—and you won’t notice until you run the numbers at tax time.
Expense Stack: Taxes, Insurance, Vacancy, Upkeep
Every expense below sits between gross rent and net income. Miss one and the yield you calculated is fiction:
- Property taxes. Typically the largest annual hit. At 1.1 % of assessed value on a $120,000 parcel that is $1,320/yr—eating 27.5 % of a $4,800 gross rent.
- Insurance. Liability coverage for vacant or leased land runs $300–$800/yr depending on use. Hunting leases and recreational access push premiums higher because of injury exposure.
- Vacancy. Crop leases often renew annually, but hunting leases and seasonal rentals can leave months uncovered. Budget 5–15 % vacancy unless you hold a multi-year lease with a credit-worthy tenant.
- Maintenance and upkeep. Mowing, fence repair, access-road grading, and drainage work vary wildly. A flat pasture might cost $200/yr; a wooded recreational tract with road frontage could run $1,500+. The Holding Cost Estimator breaks these carrying charges out year by year so nothing hides.
Stack those four items and you typically consume 40–60 % of gross rent on raw land. That is the gap between the headline yield and the cash you actually deposit.
Cap Rate vs Cash-on-Cash vs Yield
Three numbers, three different questions:
| Metric | Formula | Answers |
|---|---|---|
| Gross yield | Annual rent ÷ market value | Quick screening comparison |
| Cap rate | Net operating income ÷ market value | Property-level profitability |
| Cash-on-cash | Pre-tax cash flow ÷ total cash invested | Your personal equity return |
Cap rate ignores how you financed the deal. Cash-on-cash reflects leverage—if you put 30 % down and the debt service is low, cash-on-cash can exceed the cap rate by 2–4 points. The USDA Economic Research Service tracks average cropland rental rates by state—useful as a benchmark when you need to gut-check whether a quoted rent is in the right ballpark.
Lease Types That Change the Math
Not all leases deliver cash the same way:
- Fixed cash rent. Tenant pays a flat annual amount regardless of yield. Predictable for the landlord; the tenant absorbs crop-price and weather risk.
- Crop-share rent. You receive a percentage of the harvest (commonly one-third or one-quarter). Income swings year to year, making vacancy and expense projections harder. Per Ohio State’s Farm Office, crop-share arrangements often outperform cash rent in strong commodity years but trail badly in poor ones.
- Hunting and recreational leases. Seasonal agreements (often September–January) at $5–$25 per acre. High vacancy outside the season unless you stack summer uses like food plots or camping.
- Solar or cell-tower leases. Long-term (20–30 years) with escalation clauses. High certainty, but the land is tied up—check how the lease affects future subdivision potential before signing.
Break-Even Rent and Sensitivity Levers
Break-even rent is the minimum annual payment that covers every holding cost—taxes, insurance, maintenance, and debt service if financed—without producing a loss. For the $120,000 parcel example with $1,320 tax, $500 insurance, $400 maintenance, and no loan, break-even rent is $2,220/yr or $185/mo. Any rent above that line is genuine return; anything below means the parcel costs you money to hold.
Three levers move the break-even line most:
- Tax assessment changes. A reassessment bump of 20 % raises annual tax by $264 and lifts break-even rent accordingly.
- Vacancy rate. Moving from 5 % to 15 % vacancy on a $4,800 gross rent drops effective collections by $480 and erodes net yield by a full percentage point.
- Maintenance spikes. A single fence replacement or culvert repair can wipe a year’s net income on a low-rent parcel. Budget a contingency reserve of 10–15 % of gross rent for unplanned repairs.
Pair the break-even number with the Land Value Appreciation Projector to see whether appreciation alone justifies the hold even if rental income barely covers costs.
Red Flags When a Lease “Looks Amazing”
- Above-market rent with no escalation clause. A tenant paying top dollar today might leave next year if commodity prices drop. High rent without a multi-year commitment is volatility disguised as yield.
- Gross yield quoted without expenses. Sellers advertising “6 % return” almost always mean gross. Ask for the net operating income number and verify taxes, insurance, and management costs yourself.
- Crop-share income shown at peak-year prices. A corn-share lease valued at $7.00/bushel looked great in 2022. At $4.50 the same share delivers 36 % less income. Always stress the share against a five-year average commodity price, not the best recent year.
Use the Holding Cost Estimator to pressure-test the expense side and the Subdivision Profitability Calculator if you are weighing lease income against a potential lot-split exit.
Yields and expense ranges above are illustrative scenarios, not appraisals or guarantees. Actual lease returns depend on local market rents, tenant creditworthiness, lease terms, and holding costs that vary by county and parcel. Consult a farm manager, real estate professional, or financial advisor before relying on lease-return projections for investment decisions.