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 runs these steps for you. Then read our guide to buying the 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.