While tenant farming has roots in America dating back to the conclusion of the Civil War, it is still an atypical asset class for real estate investors. This is largely due to the fact that farmers, both active and retired, hold the vast bulk of cropland and pastureland in the country.
Farmland, on the other hand, has grown in popularity as an asset class for investors in recent years, thanks to innovative options to invest in the industry. Here’s how an investor might add farmland to his or her portfolio.
Buy land directly
Directly purchasing usable cropland or pastureland and renting it out to a farmer or rancher is the most obvious approach to invest in agriculture. Because an investor would most likely need to purchase a large piece of land, this kind of farming investment requires a significant upfront cost. According to the USDA, average farmland prices were $4,130 per acre in 2018, while pastures were around $1,390 per acre. Meanwhile, investors rented cropland for $138 per acre and pastureland for $12.50 per acre, representing 3.3 percent and 0.9 percent cash yields, respectively.
Investors who want to invest in farming can choose from a variety of options, each with its own set of advantages and disadvantages:
- Buying an existing farm through a sale-leaseback agreement, in which the present farmer continues to work the land while paying the new owner rent. A sale-leaseback agreement would be the safest and most passive approach to invest in farmland directly. However, an investor may have to pay a greater price for the land in exchange, resulting in a lower cash yield.
- Purchasing and leasing an existing farm or agricultural land to a new tenant. An investor’s return could be higher if they choose this option. Finding the perfect tenant for the farm, on the other hand, would almost certainly necessitate more effort up front.
- Converting land that isn’t already used for agriculture to cropland, pastureland, or an urban farm. A farmland conversion has the best potential return because an investor would be able to purchase land for a lower price, earning a greater cash yield and perhaps benefiting from higher land value appreciation. This option, however, necessitates the most effort because an investor would have to convert the land to farming usage and identify the appropriate crops and renters for the site.
Purchase shares of specialty REITs focused on farmland
Currently, two publicly traded real estate investment trusts (REITs) specialize in buying and leasing farmland to farmers:
Farmland Partners is the largest publicly traded farmland REIT in the United States. It has approximately $1.1 billion in assets as of the middle of 2019, including 158,000 acres of farmland in 17 states. It leased this land to over 100 tenants who cultivate 26 different crop varieties, with 57 percent being row crops (corn, soybeans, rice, and cotton) and 42 percent being permanent and speciality crops (almonds, avocados, wine grapes, non-tree fruit, and vegetables).
Gladstone Land, on the other hand, possessed 111 farms totaling 86,534 acres in ten states for $876 million. It focuses mostly on farmland that is used to cultivate nutritious foods including fruits, vegetables, and nuts.
These farmland REITs are accessible to anybody with a brokerage account and enough money to buy one share, making them the most accessible and low-cost method to invest in farmland. They do, however, have some market risk because they trade on stock exchanges.
Iroquois Valley Farmland REIT is another REIT alternative. It’s a public non-traded REIT, which means it’s open to all investors but doesn’t trade on a stock exchange. The corporation focuses on owning an organic farming holdings. It does, however, have a hefty minimum investment of more than $10,000, and investors cannot redeem their shares for a period of five years.
Do REITs invest in farmland?
Investing in a farming-focused real estate investment trust is the closest an investor can go to owning a farm without actually owning one (REIT). Farmland Partners Inc. (FPI) and Gladstone Land Corporation are two examples (LAND).
Typically, these REITs buy farmland and then lease it to farmers. Farmland REITs provide a lot of advantages. For one thing, they offer significantly more diversification than purchasing a single farm, as they let an investor to own stakes in numerous farms spread across a large geographic area.
Farmland REITs also provide more liquidity than owning physical farmland because shares in most of these REITs can be sold on stock exchanges quickly. Furthermore, because a minimum investment is only the price of one REIT share, agricultural REITs reduce the amount of capital required to invest in farmland.
What are farmland REITs?
A REIT, or “real estate investment trust,” is a corporation formed solely for the purpose of holding real estate, which in the instance of a farmland REIT would be farmland. After the corporation is formed, investors gather funds to invest in various pieces of land.
Farmers rent land from the REIT after the trust is formed, and REIT investors get monthly dividend payments.
Investing in farmland allows investors to benefit from the steady returns that this asset class provides while also avoiding the hassles that come with owning and maintaining a farm. However, the returns on this sort of agricultural investment are frequently the lowest.
It is the most passive form of farmland investment because the REIT handles the management and logistics while the investors sit back and collect their dividends.
The ease with which REITs may be bought and sold, referred to as liquidity, is what makes them so appealing to investors. REITs trade on the same exchanges as stocks, so you can buy and sell them in the same way.
Farmland REITs have significantly more liquidity than conventional farmland investments, but that liquidity can and will work against you in a market sell-off because REITs are virtually closely associated with the stock market.
Can you make money renting farmland?
Let’s take a closer look at the specifics of leasing farms and what it could mean for you. Stop for a second before agreeing to let someone lease your land only on the basis of a strong handshake. It’s fantastic to have faith in your neighbors, but the danger of misinterpretation that comes with it isn’t worth it. These kind of difficulties have the potential to turn outstanding relationships into ugly feuds when, in truth, they may be avoided by first forming a plan or agreement. Make sure you create a farmland leasing form or lease agreement with them that includes all of the pertinent information (e.g., specific land uses and boundaries of the land to be used, specific dates the lease applies, farmland lease prices, who will have access to the land, etc.). It’s easier to avoid miscommunications if everything is set out in full.
Rental Income
There are a few strategies to determine some realistic land leasing prices when it comes to your farm rental income. To begin, the USDA county average rental rate is a good place to start. Cash rents for irrigated and non-irrigated cropland and pastureland are tracked by the USDA. In 2018, the average rent per acre for irrigated and non-irrigated agriculture was $215 and $125, respectively. In 2018, the average cost of renting pastureland was $12.50 per acre. The rates for farmland leasing and pasture leases vary significantly by state, with Iowa and Illinois near the top of the list (not surprising). However, you may estimate your prospective income by multiplying these farmland lease rates by the amount of acres you plan to rent out. For instance, if you rented out 80 acres of non-irrigated cropland at the average rental cost of $125 per acre, you’d make a tidy $10,000. Granted, that money would be taxable, and you’d have to file IRS Form 4835 to declare your farm rental income. But that’s not such a horrible deal for doing nothing on the property anymore, is it?
Bonus Features
Does your property have any other facilities or amenities that the tenant might use, such as barns, stalls, tractors, equipment, or fencing? If all other factors are equal, practically any farmer would prefer to lease a property with existing fencing or barns to utilize while on the land than one without. For example, if they will be grazing animals in a pasture, fencing it themselves will be a significant expenditure (and work), and it may not be worth it. However, if existing fences are still in place, it will be much easier for them to agree to lease lands from you. Similarly, having outbuildings for them to store various planting equipment (which you can restrict in the leasing agreement to minimize any unwanted clutter) or actual equipment they can use would be a huge selling feature for you to generate a greater income. Consider these factors while you promote your home.
Can I use my 401k to buy a farm?
I understand that many of our readers have occupations that are unrelated to farming, but you want to quit your job and pursue farming full-time. The lack of capital is one of the biggest disadvantages of doing so. Many of you, on the other hand, may have a valuable asset that you may use to generate the necessary working money to begin farming. Your 401(k) plan is this asset.
- Your current 401(k) plan from your previous company will be rolled over into this new 401(k) plan.
- After that, the new 401(k) plan will purchase shares in the new firm and become a shareholder (this is very similar to an ESOP).
- The money invested in the company becomes working capital, which can be used to buy equipment, plant crops, and so on.
The 401(k) has no limit on how much stock it can buy. This means that, unlike borrowing money from a 401(k) plan, which is limited to $50,000, or cashing in the plan and paying taxes and a 10% penalty on the funds received, you can invest as much money into the farm company as you like.
This type of transaction was the subject of a recent Bloomberg Businessweek story.
The article’s main point is that the IRS has identified certain potential abuses in this type of transaction.
Some taxpayers have formed a business solely for the purpose of purchasing a mobile home or other similar item.
On an audit, this will very certainly be prohibited.
However, if you’re using the money to start a farming business and will be actively farming, utilizing your 401(k) to fund it should be fine.
As with any other situation, you should consult with your tax professional.
In addition, the report mentions a corporation that has assisted in hundreds of these transactions.
Farm Leadership, Farm Operations, Farm Taxes, Profit Center, Retirement | 2 Comments » 401k Funding, Farm Industry Trends, Farm Leadership, Farm Operations, Farm Taxes, Profit Center, Retirement
What are the best farmland stocks?
- Has stood the test of time and is quite likely to continue to exist for a long time.
This article delves into the details of seven of the top agricultural stocks. The table of contents below will help you rapidly traverse the article.
Table of Contents
Below is a list of our top seven agricultural stocks. The nature of these rankings is qualitative. Due to a combination of business quality and future growth possibilities, we feel the following 7 agriculture stocks are the best options in the industry right now.
Even better, all seven agriculture equities pay dividends, making them appealing to income investors. Interested investors should use this as a jumping-off point for further investigation.
Is buying land a good investment 2021?
The concept of purchasing land and investing in land is misunderstood. The majority of individuals are unaware of how the land-buying process works. Land investment is, without a doubt, a good strategic decision for investors looking to diversify their portfolios.
Surprisingly, when it comes to investing, many individuals neglect land. Is land a good investment in 2021, you might wonder? YES! is the quick answer.
Of course, it isn’t for everyone, but investors who want to diversify their portfolio while also making money might explore property. Land investment is an important real estate investment that you should be aware of. Land as an investment can be advantageous since it provides investors with higher returns at reduced risks while also allowing them to diversify their portfolios. House flipping and other real estate investments are popular in addition to land investing. As a result, you must be interested in investing in it.
We’ve decided to dispel some myths about the advantages of land investments after discovering some surprising facts. Here are six surprising reasons why land will be a profitable investment in 2021 and why you should invest in land.
Is farmland going up in value?
USDA data shows that total farm real estate values in the United States are up 7% from 2021, according to Farmer Mac’s The Feed Fall Edition. Farmland returns, according to Jackson Takach, a Farmer Mac economist, are still on stable ground and considered a secure investment when adjusted for inflation.
“Farmland is viewed as a solid inflation hedge by everyone from farmers to institutional investors. In an inflationary context, it has historically performed well against rising inflation, as have other real assets,” Takach notes. “When individuals consider a suitable safe storage for the US dollar in a higher-priced environment, this is undoubtedly at play today. Farmland is, and should be, a part of that conversation.”
How do you make money with farmland?
16. Provide both indoor and outdoor storage options
There are many people who have purchased a boat but have never considered where they will store it during the offseason. Perhaps their garage is full and they need a place to store extra lawn equipment. There are an infinite number of scenarios like this. Plus, if you have the capacity, providing indoor storage can be profitable and requires very little maintenance on your part.
17. Rent out fishing lakes or ponds to local anglers or groups.
Renting to RVers is number 18 on the list.
19. Own and operate an indoor/outdoor animal daycare.
20. Rent out your land as a campsite.
21. Raise cows and sell the milk they produce.
22. Keep goats and sell their milk
These days, goat cheese is highly popular among the healthy, crunchy crowd. It’s easier for the body to digest, especially for lactose intolerant persons. It’s lower in fat and calories, but higher in nutrients, than other cheeses, and it’s high in calcium. Offering reasonably priced local goat cheese may, without a doubt, be a silent winner on this list.
23. Raise and sell animals such as dogs and llamas.
24. Lease some of your land for hunting, farming, or other outdoor activities.
25. Rent out your property or barn for special occasions such as weddings or private gatherings.
26. Grow pumpkins and host seasonal activities such as pumpkin patches.
27. Plant corn and provide seasonal activities such as corn mazes.
28. Establish a dog park in the neighborhood
29. Create a neighborhood playground
30. Provide outdoor fitness and wellness classes such as yoga and zumba.
Outdoor yoga is becoming increasingly popular. Naturally, this would be a seasonal revenue stream (depending on where you live), but giving these types of activities could spark interest in other services or goods your farm offers, so it could have a dual purpose. The cost of these workshops often ranges from $5 to $10 per attendee, with half of the proceeds going to the instructor and the other half to the venue owner.
Is farmland a good investment UK?
A well-established increasing trend in agricultural land values has already emerged. This is partially due to the fact that, as Mark Twain observed, they are no longer producing it, and partly due to the fact that larger populations mean more mouths to feed. Savills Research’s Ian Bailey sums it up: “Over the last ten years, farms and forestry have outperformed all other assets in the United Kingdom.” David Hebditch of Chesterton Humberts, a competing estate agency, agrees: “The agricultural sector has prospered in ways it has never before, and farmland values have reached all-time highs. They will rise by an average of 6% every year over the next five years, according to our forecast.”
Is farmland considered real estate?
Direct investments in farmland are an appealing prospect since they provide consistent returns on investment, have a low correlation to “conventional” assets like bonds and equities, and act as an inflation buffer. Historically, investors have had limited access to farmland as an investment since it is a somewhat illiquid market with a high cost-to-entry, similar to commercial real estate (CRE). The rise of crowdfunding sites has reduced these formerly prohibitive hurdles to admission.
Even to those who are accustomed with real estate investing, farmland investment may appear exotic.
However, by using similar frameworks from traditional real estate investing, combined with our team’s knowledge, you may benefit from the $2.5 trillion US farmland market in your portfolio.
Active v. passive
Farmland and CRE investing typically demand a longer time horizon (5 years or more). Short-term, often high-risk/high-reward active choices, such as house flipping, are available in conventional real estate, but not on agriculture.
Active investments in CRE are usually easier to imagine undertaking on your own (i.e. being a landlord versus pruning and harvesting your own almond trees).
You can employ someone to manage the property for you, allowing you to become a more passive investor and reduce your margins, but this may only make sense at scale and still necessitates experience in property selection.
In terms of the passive end of the spectrum in CRE, you can purchase shares in investment vehicles such as REITs, ETFs, and mutual funds, which will choose and manage a portfolio of properties on your behalf.
Your investments, on the other hand, are determined by the portfolio manager’s methodology and the fund’s scope.
Investing in farmland provides the same active and passive alternatives. Farmland, on the other hand, has just recently become a more accessible investment prospect. Crowdfunding, which debuted in 2012, allows investors to choose specific assets (such as more active options) that are analyzed and managed by a professional team (like more passive options). In the case of farmland, an online investing platform can provide the benefits of direct ownership without requiring agriculture expertise or the scale to purchase an entire farm.
Different types – risks & returns
Farmland, like traditional real estate, is not homogeneous; there are several diverse varieties, each with its own set of risks and rewards. Just as with CRE, you can categorize different types of farms according on what they’re used for, giving you a sense of how market trends influence valuations.
Farmland has pastureland and various types of agriculture, whereas CRE has multifamily, retail, office, hotel, and industrial.
Cropland is divided into annual crops and permanent crops. Annual crops include row crops and specialty crops.
Annual crops are exactly what they sound like: they’re planted and farmed every year.
The large cereals and commodities (corn, soybeans, etc.) are grown in row crops, while annual speciality crops are mostly vegetables.
Permanent crops are distinct in that they take a few years to mature and have an economic life of 20 years or more, with some lasting even longer.
Less risk is associated with greater flexibility in adapting to market movements.
A multi-industry office building, for example, can be rented out to several types of enterprises, whereas a manufacturing plant is less versatile. Crops planted annually on fields allow farmers to study consumer and price trends before determining what to plant the following year (i.e. removing crops that were not profitable). Row crops, like commodity grains, are used for a variety of purposes (food, feed, etc.) and are often protected by the government. They have smaller margins due to their more stable demand.
Permanent crops, in which we invest the most, carry a larger risk but can yield a bigger return.
Trees take several years to become economically successful, tying an owner to what they’ve planted or forcing them to start over.
When there’s an excess, as there is now with wine grapes, this can mean poor pricing for growers, which is why we always consider market dynamics and trends when buying mature trees or determining what to plant for a new development.
The difference in return volatility between annual and permanent crops may be seen in the table below, particularly in the income-derived returns.
Location and quality are key
…but the elements you’re taking into account aren’t the same. Farmland is sometimes included along with other “land” categories in real estate investing, but it’s more equivalent to a specialized sort of CRE like industrial. As with any other real estate investment, location is crucial since it determines the feasibility of various property kinds, such as a high-tech, class A office building. Even if a commercial office facility is inexpensive to buy or operate, it will not be in high enough demand in rural Oklahoma. You can have a fantastic property with amazing water and soil, but if you try to produce lemons in Montana, you won’t get very far because the temperature isn’t right.
Any property we buy is subjected to a thorough due diligence process by our team.
The following are some of the factors that go into determining location and quality:
Income streams
Income and appreciation are two types of real estate returns. The appreciation returns won’t be realized until the property is sold, but you can estimate them in the meantime by marking-to-market. Rent or revenue are the two types of income. In the commercial real estate industry, rent is the standard, with lease periods varying by industry.
Almost 40% of US farmland is rented, and over 50% of cropland, excluding pastureland, is rented, which means that leasing to an operator can entail receiving rental money like any other form of renter in real estate. There’s also revenue-sharing, or variable rent, for farmland especially. For the operator, this structure leads to a significantly lower fixed rental charge with a variable part based on revenue. With successful harvests, both the owner and the operator profit more (or less in a bad year).
For example, at Jupiter Farm, we’re buying a walnut orchard whose yields will increase by 20% in three years thanks to additional inputs from FarmTogether investors and enhancements from our operator, such as improved pruning.
In a variable-rent approach, we’ll both gain from our contributions to the property’s increased yields.
Furthermore, when we sell, the yield data we’ll be able to present will support a higher resale value.
