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Historically, most farmlands are inherited and passed down from generation to generation, leaving investors “out of the game.” However, in recent years, there have been increased opportunities for attracting investors interested in buying farmland as an investment.
In this article, we’ll explore the idea of buying farmland for investment and also walk you through the process of how to buy farmland for investment.
‘Veggies are not always found in pots‘. Acquiring farmland for an investment could extend well beyond just consumable food items.
For instance, growing crops that are also used to generate biofuels, which remain in high demand, would be a sensible and viable venture as well.
Before we go on to talk about how to buy farmland for investment, let’s get you to know why you should invest in farmland.
Why Should I Invest In Farmland?
In 2019, the U.S. Energy Information Administration announced that electricity generation by wind turbines represented 7.3% of total U.S. utility-scale electric generation. Consider the fact that since 2000, wind-generated electricity increased from 6 billion to 300 billion kilowatt-hours (kWh). You might want to pause and think about that data!
Over the last 50 years, the value of American farmland has risen by about 6.1% per year, with only five down years during that period. Since 1991, farmland has produced a positive return every year, generating an average annual return of 11.5%, according to the USDA. To put that return into perspective, it has outperformed all other asset classes except the Dow Jones REIT Index during that time frame.
The aforementioned factors practically ensure a high performing portfolio for those thinking of buying farmland as an investment.
Similarly, investors can buy land directly from an owner and rent it to someone else, or even reappropriate other lands as farmland. Additionally, if you want to invest in farmland without having to get your hands dirty, you can also invest in farmland real estate investment trusts (REITs), which are traded like a stock, or through a crowdfunding platform, such as FarmFundr.
Investing in farmland combines the fascination of a tangible asset with annual returns of 12%. In other words, buying farmland for investment, along with maintaining a diverse portfolio, maybe a smart bet for future financial success. According to Forbes, investors can make money in two ways: from the annual cash rent that farmers pay to use the land and also from steady increases in land values.
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How To Buy Farmland For Investment
Farmland has been growing as an asset class for investors in recent years as new ways to invest in the sector have been developed. Here’s a look at how an investor can add some farmland to their portfolio.
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Buy land directly
This is an obvious and seamless way to invest in farmland. All you need to do is purchase usable cropland or farmland and rent it out to a rancher or farmer.
This method of investing in farming has a quantifiable upfront cost since an investor would likely need to purchase a large plot of land. Average land prices for cropland were $4,130 an acre in 2018, while pastures cost about $1,390 an acre, according to the USDA. Meanwhile, investors typically rented out cropland for $138 an acre and pastureland for $12.50 per acre, implying cash yields of 3.3% and 0.9%, respectively.
Investors that buy land as a way to invest in farming have several options, each of which has its share of advantages and disadvantages:
- Purchasing an existing farm via a sale-leaseback transaction, where the current farmer remains a worker on the farm while paying rent to the new owner. A sale-leaseback transaction seems to be the least risky and most passive way of directly investing in farmland. However, in exchange, an investor might need to pay a higher price for the land and earn a lower cash yield.
- You can also choose to buy existing farmland and lease it to a new tenant. This option though interesting will require an intense search for the right tenant for the farm.
- Acquiring farmland and using it to create biofuels, which remain in high demand, would be a realistic and viable pursuit as well. And don’t forget about the use of farmland for wind farms.
Converting a farmland has the potential to produce the highest return since an investor would likely be able to purchase land for a lower price and, therefore, could earn a higher cash yield and potentially benefit from higher land value appreciation. However, this option requires the most work since an investor would need to transform the farmland for use.
Two publicly traded real estate investment trusts (REITs) currently focus on acquiring farmland and leasing it to farmers:
- Farmland Partners (NYSE: FPI).
- Gladstone Land Corporation (NASDAQ: LAND).
Farmland Partners is the biggest of the U.S. publicly traded farmland REITs. As of the middle of 2019, it had roughly $1.1 billion of assets, including 158,000 acres of farmland in 17 states. It leased this land to more than 100 tenants that grow 26 kinds of crops, 57% of which are row crops (corn, soybeans, rice, and cotton) and 42% of which are unchanging and specialty crops (almonds, avocados, wine grapes, non-tree fruit, and vegetables).
Gladstone Land owns 111 farms with 86,534 total acres in 10 states valued at $876 million. It mainly focuses on farmland used to grow healthy foods such as fruits, vegetables, and nuts.
Any investor with a brokerage account and enough money to buy one share can invest in these farmland REITs, making them the most convenient and lowest-cost way to invest in farmland. However, because they trade on stock exchanges, they tend to be volatile.
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Another REIT option is Iroquois Valley Farmland REIT. This is a public non-traded REIT that is open to all investors but doesn’t trade on a stock exchange. The company focuses on owning a portfolio of organic farmland. Nevertheless, it has a high minimum investment of more than $10,000, and investors can’t redeem their shares for five years.
Invest through a crowdfunding platform focused on farming
Various companies have formed in recent years to provide admittance to farmland investments using the internet. However, most of these farmland crowdfunding platforms are only open to accredited investors — those with a high net worth of more than $1 million excluding the equity in their primary residence or high income of $200,000 in each of the last two years, or $300,000 if married.
Here’s a list of crowdfunding platforms focused on farming
AcreTrader is a crowdfunding platform that provides accredited investors with direct access to farmland. Most of its offerings require an investor to buy 10 shares, which is equivalent to one acre of land that generally costs between $3,000 and $10,000 per acre. Instead of holding the legal title to the physical acre of land, investors own shares in a limited liability corporation (LLC) that holds legal title.
FarmFundr is a crowdfunding platform that allows accredited investors to invest in a variety of possibilities like farmland and agricultural facilities.
FarmTogether is an online marketplace for farmland investing. It affords accredited investors with direct access to pre-vetted U.S. farmland investment opportunities. Investors can invest immediately in specific farms or in a fund that holds several farm investments.
#4 Farmland LP
Farmland LP concentrates on buying commodity farmland and transforming it into more valuable organic farmland. It offers accredited investors the opportunity to engage in a private equity fund that has the extensibility of eventually becoming a REIT and going public.
#5 Harvest Returns
Harvest Returns is a crowdfunding platform offering a good number of agricultural deals that are mainly open to accredited investors.
Steward is a crowdfunding platform centered on investing in sustainable farms. It aims to provide farmers with capital (in the form of loans) to sustain and expand their farms.
What Are The Risks Of Investing In Farmlands?
Just as it sounds all enticing to buy a farmland for investment, there are few major risks associated with investing in farmland. One of which is liquidity. If you own physical farmland, the land can’t be easily sold unless you engage the services of a broker. In this sense, it makes the business an illiquid investment because of the lack of a defined exit strategy.
Publicly traded farmland ETFs get rid of the liquidity problem by being easy to buy and sell through online brokers.
The second risk associated with farmland is a knowledge problem. Except you are conversant with the asset class well, it can be tough to buy land at a good price. If you overpay, you may be stuck with a redundant asset for a long time. Those who are fully knowledgeable about the agricultural sector may lessen this risk by only buying specific land that meets their personal criteria. Generally, publicly-traded ETFs solve this issue by having many buyers and sellers. Generally, the imperfect knowledge of many buyers and sellers tends to lead to a reasonable price for the shares.
FarmTogether alleviates risks by partnering with agricultural industry experts and farmland management experts. By partnering, FarmTogether gains an understanding of the multiple risks associated with buying farmland for investment and can cook those costs into deals.
Summarily, the best way to beat avoidable risks is by heeding to expert advise and keeping up with research.
To tap into this area of wealth, you need the knowledge carefully itinerated in this article. Read through and get the idea.