# Buying land or machinery

A free short course from Farm CFO by Clunes Rural. 5 lessons, about 25 minutes in all. No sign-up.

Work out whether to buy or lease land, whether an extra block pays, whether to own or contract machinery, and what the bank will want.

Who it's for: Livestock and mixed farm families weighing up a land purchase, a lease or a big machinery buy.

You'll be able to:
- Compare the yearly cost of buying and leasing land
- Test whether an extra block can pay its way
- Weigh owning a machine against using a contractor
- Understand balloons and what the bank looks for

## Lesson 1: Buy or lease land

More country can mean more stock, more scale and a better spread of overheads. But you don't always have to own it to run it. Leasing is a real option, and for some families it's the better one.

## What buying gives you

When you buy, you control the land for as long as you own it. You can improve it, fence it and plan for the long term. If land values rise, your equity (what you own less what you owe) grows. Land is also security the bank can lend against later.

The cost is cash and debt. You need a deposit, purchase costs such as transfer duty (stamp duty), legal fees and a valuation, and then the interest and repayments on the loan. Rates, insurance and upkeep come on top.

Land values can fall as well as rise, so don't count on growth to make the numbers work.

## What leasing gives you

A lease lets you run more stock without tying up a large deposit or taking on big debt. Your yearly cost is the rent, plus whatever the lease makes you responsible for, such as fences or water points.

The downside is security of tenure. When the lease ends, the owner may sell, raise the rent or take it back. Any improvements you make may stay with the land. Read the lease carefully, and get your solicitor to check it.

## Compare the yearly cash cost

A fair first comparison is the yearly cash cost of each option:

- **Buying:** interest on the borrowed money, plus rates, insurance and upkeep. Remember the principal repayments and the cash you put in as a deposit.
- **Leasing:** the rent, plus any costs the lease puts on you.

Then ask what the deposit could do elsewhere. Cash tied up in land can't pay down the overdraft or buy stock.

Our [buy or lease land calculator](https://farmcfo.com.au/tools/buy-or-lease-land) sets the two side by side. Use real quotes: the asking price, the lease rate on offer and an interest rate from your lender.

## Questions to ask

- How long is the lease, and is there an option to renew?
- Who pays for fences, water and weed control?
- Would buying stretch the business too far in a dry year?

Our [before you buy land checklist](https://farmcfo.com.au/templates/before-you-buy-land) covers the rest. Tax and how the purchase is structured are questions for your accountant and solicitor.

### Worked example

**An invented 400 ha block.** The figures and the 7% interest rate are illustrative, not a quote.

- **Buy:** at $4,500 a hectare, the price is 400 × $4,500 = $1,800,000. The family puts in $600,000 and borrows $1,200,000. Interest is $1,200,000 × 7% = $84,000 a year. Rates and insurance add $6,000, so $90,000 a year before any principal.
- **Lease:** at $110 a hectare, rent is 400 × $110 = $44,000 a year.

Leasing costs $46,000 a year less in cash, and frees up $600,000. Buying gives control and possible growth. The family has to decide whether that is worth the extra $46,000 a year and the deposit.

Try the buy or lease land calculator: https://farmcfo.com.au/tools/buy-or-lease-land

### Check your understanding

1. What is equity?
   Answer: What you own less what you owe. Equity is the value of your assets less your debts. Buying land can grow it, if values hold or rise.
2. What is a main downside of leasing land?
   Answer: When the lease ends, the owner may sell, raise the rent or take it back. Leasing saves cash, but you don't control the land long term. That's called security of tenure.
3. Should you rely on land value growth to make a purchase work?
   Answer: No, values can fall as well as rise. Growth isn't guaranteed. The purchase should stack up on the farm's income, with growth as a bonus.

## Lesson 2: Will the extra block pay?

The neighbour's block comes up. It shares a fence and a creek, and it may not come up again for a generation. It's easy to fall in love with it. Before you bid, work out whether it can pay its own way.

## The basic test

An extra block pays if the extra income it brings in is more than the extra costs it adds, including the cost of the money. In plain terms:

1. **Extra gross margin.** What the extra country will run or grow, in an average season, less the direct costs of running it. Gross margin is income less the direct costs of an enterprise, such as animal health, feed and freight. Use your own figures where you can.
2. **Less extra overheads.** More fencing, water, rates, insurance, fuel and maybe labour.
3. **Less interest** on the money borrowed to buy it.

If what's left is positive, the block adds to profit. If it's negative, the rest of the farm is paying for it.

## Then the harder questions

- **Principal repayments.** Interest is a cost, but you also have to pay the loan down. That comes out of cash after tax and family drawings.
- **A poor season.** What does the block earn when it's dry? Run the numbers on a poor year, not just an average one.
- **Your own cash.** Any deposit you put in could have done something else, such as paying down debt.
- **Purchase costs.** Transfer duty, legal fees and a valuation add to the cost. Get your solicitor and accountant to confirm them.

## Why it's still sometimes worth it

A block that only just breaks even can still make sense. It may let you spread fixed costs, such as machinery and labour, over more hectares. It may give you a drought reserve. It may suit a succession plan. Those are real benefits, but put a number on them where you can, and be honest about what you're paying for them.

## Use the calculator

Our [will the extra block pay calculator](https://farmcfo.com.au/tools/extra-block) runs these steps for you. Then read our guide to [buying the neighbouring block](https://farmcfo.com.au/guides/buying-neighbouring-block), which covers what the bank will want and how it values the land.

If the numbers are tight, that's useful to know now. It's much better than finding out after the hammer falls.

### Worked example

**An invented 500 ha block.** The figures, the $40 gross margin per DSE and the 7% rate are illustrative. DSE means dry sheep equivalent, a way of comparing stock classes.

The block costs $1,500,000. The family puts in $300,000 and borrows $1,200,000.

| Item | Amount |
|---|---:|
| Extra gross margin, 2,500 DSE × $40 | $100,000 |
| Less extra overheads | -$20,000 |
| Less interest, $1,200,000 × 7% | -$84,000 |
| **Result each year** | **-$4,000** |

In an average year the block falls $4,000 short, before principal repayments. The family could still buy it for other reasons, but they now know the rest of the farm would be carrying it.

Try the will the extra block pay calculator: https://farmcfo.com.au/tools/extra-block

### Check your understanding

1. What is gross margin?
   Answer: Income less the direct costs of an enterprise. Gross margin is income less direct costs such as animal health, feed and freight. Overheads come off after that.
2. Which season should you also test the block's numbers on?
   Answer: A poor season. An average year can hide risk. Testing a dry year shows whether the farm can still carry the extra debt.
3. If the block's result is negative after interest, what does that mean?
   Answer: The rest of the farm is paying for the block. A negative result means the extra country doesn't cover its own costs, so the existing farm makes up the gap.

## Lesson 3: Own or contract machinery

A new machine is exciting. It's reliable, it's there when you need it and it can make the job faster. But owning gear costs money every year, even when it sits in the shed. Sometimes a contractor is cheaper.

## The costs of owning

When you own a machine, there are two kinds of cost.

**Fixed costs** happen whether you use it or not:

- **Depreciation:** the value the machine loses each year. A simple way to estimate it is the price less what you'd expect to sell it for, divided by the years you'll keep it.
- **Interest:** on the money borrowed, or the interest you could have earned or saved if you'd used your own cash.
- **Insurance and housing:** cover and a shed to keep it in.

**Running costs** go up with use: fuel, repairs, servicing, and your own or your staff's labour.

## The costs of contracting

A contractor usually charges per hour, per hectare or per unit, such as per bale. You pay only for the work done. You avoid the fixed costs, but you may wait for the contractor in a busy season.

## Compare on the same unit

Work out your cost per hour, per hectare or per bale if you owned the machine:

1. Add up the yearly fixed costs.
2. Add the running costs for the work you'll do.
3. Divide by the hours, hectares or bales.

Then compare that with the contractor's rate.

## The break-even point

Fixed costs are spread over the work you do. The more you use a machine, the cheaper each unit gets. So there's a break-even point: below it, the contractor is cheaper. Above it, owning is cheaper. Be honest about how much work the machine will really do.

## It's not only about cost

- **Timeliness.** Getting hay baled or a crop sprayed at the right time can be worth more than the cost difference.
- **Labour.** Do you have the people to run it?
- **Risk.** A machine is a fixed cost in a dry year, when you may do less work.

Our [own or contract calculator](https://farmcfo.com.au/tools/own-or-contract) runs the numbers, and the [machinery register](https://farmcfo.com.au/downloads/farm-cfo-machinery-register.xlsx) helps you track what you own, its age and what it's costing. The [before you buy machinery checklist](https://farmcfo.com.au/templates/before-you-buy-machinery) covers the questions to ask first.

### Worked example

**An invented hay baler.** The figures are illustrative, including the 7% interest rate.

The baler costs $90,000. The family expects to sell it for $30,000 after 10 years. They bale 3,000 bales a year.

- **Depreciation:** ($90,000 - $30,000) ÷ 10 = $6,000 a year.
- **Interest:** $90,000 × 7% = $6,300.
- **Insurance and shed:** $1,200.
- **Fixed costs:** $6,000 + $6,300 + $1,200 = $13,500.
- **Running costs:** $2.00 a bale × 3,000 = $6,000.
- **Total:** $19,500, or $6.50 a bale.

A contractor charges $7.50 a bale, so $22,500. Owning saves $3,000 a year. Break-even is $13,500 ÷ ($7.50 - $2.00), about 2,455 bales.

Try the own or contract calculator: https://farmcfo.com.au/tools/own-or-contract

### Check your understanding

1. Which of these is a fixed cost of owning a machine?
   Answer: Depreciation. Depreciation happens whether or not you use the machine. Fuel and labour go up with use.
2. What happens to the cost per unit as you use a machine more?
   Answer: It falls, because fixed costs are spread over more work. Fixed costs are shared across more hours, hectares or bales, so each unit costs less.
3. Below the break-even point, which option is usually cheaper?
   Answer: Using a contractor. If you don't do enough work to spread the fixed costs, the contractor's rate works out cheaper.

## Lesson 4: Equipment finance basics and balloons

Most tractors, utes and big machines are bought with equipment finance. The machine is usually the security, which means the lender can take it and sell it if you don't pay. That's why you often don't need to offer land.

## The main types

They mostly differ in who owns the machine during the contract.

- **Chattel mortgage:** a chattel is a movable item, like a tractor. You buy it and own it from day one. The lender takes a mortgage over it as security.
- **Hire purchase:** the lender owns the machine while you pay it off. You own it after the last payment.
- **Finance lease:** the lender owns the machine and leases it to you. What happens at the end depends on the contract.

Each type has different GST and tax treatment. Ask your accountant before you sign. Our [equipment finance guide](https://farmcfo.com.au/guides/equipment-finance-for-farmers) explains them in more detail.

## Balloons

A balloon, also called a residual, is a lump sum left owing at the end of the contract. It lowers the regular repayments, because you aren't paying off the whole price during the term.

[Moneysmart](https://moneysmart.gov.au/loans/car-loans) warns that you repay the lump sum with interest, so the total cost is generally higher. It says to be confident you'll have the money when it falls due. A balloon is fine if you've planned for it. It hurts when it falls due in a poor year.

## Match the term to the machine

The [GRDC](https://grdc.com.au/resources-and-publications/all-publications/publications/2018/financing-debt-structuring-and-asset-life-cycles-fact-sheet/full-content) says the loan should line up with the machine's useful life, and that contracts longer than 60 months are unusual. Repayments should finish before the machine is worn out. The danger is a balloon on a machine that is worn out by the time it falls due.

## What to compare between quotes

1. The interest rate, and whether it's fixed.
2. Fees, such as establishment, broker or dealer fees, and monthly fees.
3. The balloon, if any.
4. The cost of paying out early.
5. The total of all repayments, the balloon and fees. That one number makes quotes easy to compare.

## Buying second-hand

Search the [PPSR](https://www.ppsr.gov.au/education-hub/ppsr-and-your-business/farming-and-agriculture) (Personal Property Securities Register) before buying used gear privately. It shows whether the machine still has finance owing on it.

Our [equipment finance repayments calculator](https://farmcfo.com.au/tools/equipment-finance-repayments) shows the repayments with and without a balloon.

### Worked example

**An invented tractor.** The figures and the 8% rate are illustrative, not a quote. It costs $120,000 before GST, financed monthly over 60 months, with fees left out.

| | No balloon | 30% balloon |
|---|---:|---:|
| Balloon at the end | $0 | $36,000 |
| Monthly repayment | $2,433.17 | $1,943.22 |
| Total of 60 repayments | $145,990 | $116,593 |
| Total paid, with balloon | $145,990 | $152,593 |
| Interest paid | $25,990 | $32,593 |

The balloon saves $489.95 a month but costs $6,603 more in interest, and leaves $36,000 to find in year five.

Try the equipment finance repayments calculator: https://farmcfo.com.au/tools/equipment-finance-repayments

### Check your understanding

1. Under a chattel mortgage, who owns the machine during the contract?
   Answer: You do. With a chattel mortgage you buy and own the machine. The lender holds a mortgage over it as security.
2. What does a balloon do to the total cost of finance?
   Answer: Generally makes it higher, because you pay interest on the lump sum. A balloon lowers regular repayments, but the lump sum carries interest the whole time, so the total cost is generally higher.
3. Why search the PPSR before buying second-hand gear?
   Answer: To see whether it still has finance owing on it. If a lender has a registered interest, the gear could be repossessed. The PPSR search shows this.

## Lesson 5: What the bank wants to see

Whether it's land or a big machine, the bank asks three questions. Can you make the repayments? What backs the loan if you can't? And how have you run things so far? Come prepared for all three.

## Can you make the repayments?

This is called servicing, and it's where most of the bank's attention goes. A strong balance sheet won't save a deal the farm can't pay for.

The bank wants a budget for the whole farm after the purchase, not just the new block or machine. That means extra income, extra costs, and the interest and repayments on the new debt. One measure it looks at is interest cover: how many times your profit before interest and tax covers the interest bill. The higher, the safer. Each bank sets its own limits.

Expect the bank to test a poor season too. Our [season stress test](https://farmcfo.com.au/tools/season-stress-test) does the same thing.

## What backs the loan?

This is security. For land, the bank lends against its own valuation, not the price you pay. If you pay more than the valuer's figure, you fund the gap from your own equity. The [Banking Code of Practice](https://www.ausbanking.org.au/2025-banking-code-of-practice-screen-reader-friendly/) says that if you paid for a valuation of agricultural property, the bank will give you a copy. Ask for it.

The bank also looks at your LVR (loan to value ratio): total debt divided by the value of all the security. Each bank sets its own limit for farmland.

## Your track record

The bank looks at your past results, your equity and how you've run your accounts. Clean, up-to-date figures help a lot.

## What to bring

- Three or four years of financial statements.
- A statement of position: everything you own and owe.
- A budget and monthly cashflow for the farm after the purchase.
- Quotes, the contract of sale, or the lease.

Use our [borrowing capacity calculator](https://farmcfo.com.au/tools/borrowing-capacity) for a first idea of what might be possible. It's a guide only. Only the lender can tell you what it will lend, after its own assessment.

## Get the bank's view early

Talk to the bank before the auction or before you sign. If the numbers don't stretch, you'll know before you're committed.

If you want to know where your business stands before that conversation, our Farm Health Check looks at your figures the way a lender would.

### Worked example

**An invented cattle business.** The 50% lending limit and the 7% rate are illustrative, not any bank's policy.

The block is $2.2 million, but the bank values it at $2.0 million. Purchase costs are $120,000. The home farm is valued at $5.0 million with $1.6 million owing.

- **Combined security:** $5.0m + $2.0m = $7.0m. At 50%, total debt can be $3.5m.
- **New borrowing:** $3.5m - $1.6m = $1.9m.
- **Needed:** $2.2m + $120,000 = $2.32m, so $420,000 must come from the family.

Interest rises from $112,000 to $245,000 a year. With profit before interest and tax up from $400,000 to $560,000, interest cover falls from 3.6 to 2.3 times.

Try the borrowing capacity calculator: https://farmcfo.com.au/tools/borrowing-capacity

### Check your understanding

1. When you buy land, what does the bank lend against?
   Answer: Its own valuation. The bank's security is what a valuer says the land is worth. Any amount you pay above that comes from your own funds.
2. What is interest cover?
   Answer: How many times profit before interest and tax covers the interest bill. Interest cover shows how comfortably the business can pay its interest. Lower cover means less room in a bad year.
3. What does LVR stand for?
   Answer: Loan to value ratio. LVR is total debt divided by the value of the security. Each bank sets its own limit.

## Next step

Farm Health Check: https://farmcfo.com.au/health-check

## Sources

- [GRDC, Financing: debt structuring and asset life cycles fact sheet (2018)](https://grdc.com.au/resources-and-publications/all-publications/publications/2018/financing-debt-structuring-and-asset-life-cycles-fact-sheet/full-content)
- [ASIC Moneysmart, Car loans](https://moneysmart.gov.au/loans/car-loans)
- [PPSR, Farming and agriculture](https://www.ppsr.gov.au/education-hub/ppsr-and-your-business/farming-and-agriculture)
- [Australian Banking Association, 2025 Banking Code of Practice (screen reader version)](https://www.ausbanking.org.au/2025-banking-code-of-practice-screen-reader-friendly/)

General information only, not financial, tax, legal or credit advice. These courses are not nationally accredited training.