These days, people choose to put their money into a wide range of different investments, from mutual funds and exchange-traded funds (ETFs) to stocks and bonds. But there are other kinds of investments that growing numbers of financially savvy individuals have been utilizing, and they have managed to find great success in terms of monetary returns. One of the most promising investments is farmland, which may sound surprising. While investing in and owning farmland used to be a much more complicated process, changes in the supply and demand for local, farm-grown food have turned farmland investing into a very lucrative financial opportunity.
Why is Farmland a Good Investment?
America contains approximately 911 million acres of quality farmland, and as much as 31% of it is owned by investors and investment groups. According to data released by AcreTrader, farmland has, on average, shown to produce an impressive consistency in its ability to bring about strong investment returns. The value of other investments (like stocks) can fluctuate drastically and go down by as much as 40%-50% in a single year. Farmland, however, has created positive returns with an average of 12% every year since 1990. The success of farmland returns is not tied to other investments’ performance. Instead, returns are based on two primary factors; increases in general farmland values, along with cash rental payments and crop yields.
How Farmland Compares to Other Real Estate Investments
Like other types of real estate investments, farmland can earn money for investors in a few distinct ways. These include: being leased to farmers who can use it to grow crops, the value of the land increasing over time, and selling the property. Also, like other real estate investments, farmland can be managed both actively or passively, providing investors with a wide range of opportunities when it comes to how they want to care for the land. For example, say that an investor purchases 200 acres of farmland in Colorado. They can then use it themselves to grow crops, rent it out to farmers who will produce crops, or pay for the services of a management company that can also rent out the land on the investor’s behalf.
As stated briefly in the previous sections, farmland differs from other real estate types and other types of investments in general. For example, data shows that the cumulative returns on farmland between 1990 and 2018 have demonstrated the second largest monetary increase of all investments listed (beaten out only slightly by Real Estate Investment Trusts (REITs)). Data also indicates that this growth in the worth and performance of farmland occurred without any extreme volatility or price fluctuations, which cannot be said for many of the other types of investments.
What are the Benefits of Investing in Farmland?
Farmland has several benefits over choosing to invest in other real estate types, though the primary benefit arguably comes along with changes in global supply and demand. As populations have continued to grow throughout the world and the amount of available farmland acreage has shrunk over time, it has become a much more valuable asset class whose returns have significantly and consistently beaten out those of other types of investments. Another significant benefit is farmland’s low volatility and ability to perform well, even when other assets within the market fail. This is a serious boon to investors during periods of financial instability, including the financial and housing crisis of 2008 and the COVID-19 pandemic of 2020.
There is a range of several tax advantages available to agricultural investors who choose to put their money into farmland. Naturally, every investment is unique, and there is no way to completely guarantee that each of these advantages will apply in every situation. Also, please know that this list is not a comprehensive one. While some other, more minor examples could be included here, the specific tax advantages that farmland investors are most likely to see as a result of their financial efforts include; depreciation benefits, conservation trust benefits, and general benefits regarding property taxes overall.
While farmland itself will not depreciate in value from the government’s perspective, certain types of crops (especially permanent ones like fruit and nut trees) may qualify for tax depreciation benefits over time, serving as a way to offset income. Depreciation applies to these types of crops because they produce resources within a limited time cycle, and that production can often take years to even start. Once fruits, nuts, and some other crops (primarily grapes) have been harvested for the year, the Internal Revenue Service (IRS) will depreciate the assets over a ten-year recovery period under General Depreciation System (GDS) guidelines.
Investors can see significant tax benefits from putting their farmland into a land conservation trust to preserve its natural ground, the ecosystems it contains, as well as any water resources attached to it. Once designated as conservation land, it remains privately owned, but the trust then purchases a conservation easement for the property, inhibiting the future development of the property, even if new owners buy it. Such easements can result in significant tax savings for the farmland owner, though depending on how it is structured, these tax savings may also apply to the land’s investors.
All fifty states within the U.S. have established a range of favorable property tax rates for agricultural land to help farmers maintain their claim over the land. This is because ever-increasing amounts of farmland and other open space are being rapidly sold and bought by developers looking to construct new suburban neighborhoods and areas for brick-and-mortar businesses. In California, for instance, property taxes can be reduced for farmland by registering the land with the Williamson ACT Program. Though these rates were initially put into place to favor farmland owners and farmers specifically, they also benefit investors. For example, low property tax rates can help to reduce tax liability for investors.
What are the Risks to Investing in Farmland?
While investing in farmland has several benefits, there are many potential risks that investors should be aware of before putting in their hard-earned funds. For example, the illiquidity of real estate investments can impede a company or land owner’s capability to respond to negative changes to the land’s yield and performance. Also, some farmland with mature permanent crops (like trees) tends to carry inherently higher risk profiles when compared to farmland dedicated to growing vegetables and other raw crops. Other risks can be involved if farmland doesn’t have access to an adequate water supply or drainage system, and even if it does, severe drought conditions are always a potential that can significantly impact the performance and value of the land. Future climate changes and worsening yearly drought conditions will only increase this risk factor’s relevance.
When Should You Invest in Farmland?
As an investor’s portfolio grows and begins to approach the mid-five to low-six figure mark, diversification becomes extremely important. Once an investor reaches that point, it may be an excellent time to start considering taking on additional investments directly into pieces of high-quality farmland or through specialized ETFs dedicated explicitly to farmland. Not only is this likely to produce favorable investment returns, but it’s also a fantastic way to start diversifying their overall investment portfolio. It can also be quite beneficial to go through an investment firm when putting money into farmland, such as Land Income. Not only do they help investors select quality farmland in which to invest, but they also work to increase the property's value by planting new vegetation, implementing new high-tech farming methods to enhance production, and improving irrigation systems.
How Much Should You Invest in Farmland
The amount that investors should spend on farmland is largely dependent upon their unique financial situation and their overall investment comfort level. Given the average returns that farmland has produced for investors and the generally low-risk profile that tends to come along with farmland investments, many investors choose to put a sizable amount of funds into farmland as part of the alternative assets section in their portfolio. According to experts, well-balanced portfolios should dedicate between 10%-12% of their value to alternative assets. Not all of it needs to be put towards farmland, however. Again, that is up to every individual investor to decide.
Are you thinking about investing in a piece of farmland in California but aren’t sure about the best way to go about it? Look at the top-quality investment services offered by the experts at Land Income today to learn about everything they can do for you.
How to Invest in Farmland
While still classified as a nontraditional asset class, farmland is a type of asset investment that has been continually growing in value for several years. With this growth has come a range of quality investment options available for those looking to put their assets into farmland with the hope of seeing steady and sizable returns on their investments. While all of these methods are available, some options will work more effectively for some investors than others. Investors should fully understand how all of these methods work and the various costs and benefits that come along with each to select the option that is likely to be the most financially advantageous.
The first option that people can use for adding farmland to their investment portfolio is private equity investment. Between 2007 and 2016, global farm funds raised more than $25 billion through their farmland investments, and institutional investors saw significant returns due to this. This method provides investors with the opportunity to participate in large farm auctions, though this tends to come with a good deal of competition between different institutional funds. However, this is not an option available to many people as a result of the high minimum amounts typically required for investments. It can cost as much as $1 million to get involved in private equity funds, and many of them have 10-year lockups for all investor funds.
Mutual Funds and ETFs
Mutual funds and ETFs are another excellent way for people to get involved with farmland investing, primarily since they can provide access to several investments and a range of companies operating within the farming sector at a single time. The best part about these forms of investment is that they free investors from conducting extensive research on the companies to whom they are dedicating their assets. They can rely on the fund manager to handle the research, but can still easily see where their money is going by examining the holding of the particular mutual fund or ETF they are using.
Farming-related REITs are a fantastic opportunity for investors looking to receive high yields and consistent income in the form of regular dividends. Securities are required by law to pay shareholders return profits as part of an exchange that allows them to avoid certain types of corporate taxation. There are several high-performing farmland REITs in which investors can get involved. Some of the best, most successful of these REITs include:
Gladstone Land Corporation (NASDAQ: LAND)
The Gladstone Land Corporation REIT was the first to specialize in buying land and leasing it to farmers. As of 2009, it owned as many as 86,534 acres across 111 different farms, which has a total value of approximately $876 million. The majority of this REIT’s funds go to farmland dedicated to growing healthy foods, including nuts, vegetables, and fruits.
Farmland Partners (NYSE: FPI)
The Farmland Partners REIT is currently the largest publicly traded farmland REIT presently operating within the investment market. As of 2019, it has approximately 158,00 acres of farmland across as many as 17 states. It leases this land to more than 100 different tenants. The majority of this land is dedicated to growing row, permanent, and specialty crops.
Crowdfunding is yet another valuable way to start investing in farmland. However, many of these platforms are only available for use by accredited investors. This term refers to two types of investors; those with either a high net worth exceeding more than 1 million or who have made a high income of at least $200,000 over the past two years. As many investors cannot meet these requirements, only a relatively small percentage of them have any access to several crowdfunding platforms. Thankfully, this isn’t always the case, and a few crowdfunding sources are willing to work with any investor for much lower minimum rates. Two top-performing crowdfunding sites include:
AcreTrader is a farmland crowdfunding platform that works with accredited investors to provide them with direct access to quality farmland. The majority of its offerings require investors to buy at least ten shares of land for between $3,000 and $10,000.
Steward is a farmland crowdfunding platform that works with all investors, and some of their offers come with minimum investments as low as $100. The platform endeavors to invest in sustainable farms by providing farmers with loan capital that can help them expand and sustain their lands.
Generally speaking, the most common method that investors use to get involved with farmland is by buying it directly. This involves finding attractive farmland, conducting research on the property, and securing a loan to then buy it. From there, investors can employ the surfaces of a property manager to find tenants and manage the business. This can be done on sites like Buy A Farm, which allows investors to buy properties on sale and bid for ones on auction.
How To Diversify Your Farmland Portfolio
It’s essential for serious investors to actively develop a diversified investment portfolio to spread out their risk, even when choosing to invest in farmland. Every type of farm, region, and crop is different, and each carries a range of potential risks and benefits that can change from year to year and even season to season. Farmland investments can be diversified in several ways, such as across geographical regions to help investors control weather-related risk factors (which are some of the most severe risks).
Farmland portfolios can also be diversified by growing a wide selection of different crops, which has the additional benefit of mitigating the risk of crop damage and death caused by sudden pest infestations or the presence of invasive plant species. This also helps control for changes to crop demand within the overall market. However, it’s important for investors not to emphasize crop diversity too intensely since certain crops (mainly corn, wheat, and soybeans) are major staples within the American market. The vast majority of farmland in the country is utilized to grow them.
When Can You Expect a Return on a Long-Term Farmland Investment
Investors must understand that farmland is a long-term investment before committing their money. It can take anywhere between twelve months to seven years before they’re able to start seeing financial returns on their investment. It’s also essential that they understand the potential impacts of short-term commodity price fluctuations for crops. Due to these fluctuations, when financial returns finally start coming in, investors should focus on them over a more extended period.
How Does Soil Fertility and Water Availability Affect a Farmland Investment
A wide range of factors can impact farmland investments, but two of the most critical that investors should be aware of include soil fertility and overall water availability.
The quality of soil fertility is classified based on a three-class system, with Class 1 soil being the best. Different crops grow better in different soil types, so investors need to match the crops they grow with the appropriate soil to maximize the farmland’s yield potential. If there happens to be any deficiencies in soil fertility, amenities can be added to improve its overall quality. However, this does take a good deal of time and money to accomplish.
There are three general sources of water when it comes to farmland; well water (from aquifers), surface water (from a lake, river, stream, or another type of water feature), and rainwater. All farmland must have at least one of these sources to have even a chance at being a successful investment, but having more than one is much better. It’s also essential that the land has quality irrigation features to ensure that all crops can be sufficiently watered.
Investing in Farmland is a Great Way to Diversify Your Portfolio
As stated previously, it’s crucial for financially savvy investors to actively develop a diversified investment portfolio, and investing in quality farmland can be an excellent way to achieve such diversification while also spreading around risk potential. Agricultural land has been shown to provide investors with competitive returns that are not tied to the performance of other financial assets like stocks and bonds or even other types of real estate investments. These, along with several other benefits, provide enormous incentives for investors to consider putting their money into some quality pieces of farmland going forward. Savvy investors looking for an effective way to expand and diversify their portfolio would do well to examine the range of pros and cons that come with such agricultural investments to determine if they would be a profitable financial decision.
Do you want to try your hand at investing in farmland but don’t know the best way to get started? Reach out to Land Income today to learn all about the top-quality investment services they offer and how they can help you take better control over your financial future.