According to the U.S. Department of Agriculture, farmland in America totals about 911 million acres. Approximately 61% of the property used by ranchers and farmers is their own, with the other 39% being rented from other landowners.
The other 31% of America’s farmland is owned by investor groups (such as retired farmers), with 10% owned by trusts, companies, or other owners, and 21% possessed by non-operating partnerships or individuals. Other operators control 8% of this farmland.
With this distribution, just a small portion of the farmland in the nation is owned by non-farming investors. As more investors add profitable farms to their investment portfolios, that portion has been expanding.
This mini-guide will look at the expanding range of strategies for buying farmland to include it in your portfolio as well as the reasons why you should consider investing in farmland.
How to Buy Farmland
Even though tenant farms in America date back to the aftermath of the Civil War, the agricultural industry continues to be an unconventional asset class for property investors. The bulk of the nation’s agriculture and pastureland is owned by farmers, both active and retired.
However, since new avenues for investing in the industry have opened up recently, farmland has become a more popular asset category for investors. Here’s how you can diversify your holdings by purchasing some acreage.
1. Buy land directly
The most straightforward strategy to invest in farmland is to buy suitable cropland or pastureland and then rent it to a rancher or farmer. Since an investor would probably need to buy a substantial piece of land, this agricultural investment strategy entails a high upfront cost.
As per the USDA, pastureland cost roughly $1,390 per acre, while crops averaged $4,130 per acre in 2018. While this was going on, investors generally rented out pastureland for $12.50 an acre and crops for $138 per acre, suggesting cash returns of 3.3% and 0.9%, respectively.
There are a number of options available to buyers of land who want to engage in farming, each with advantages and disadvantages of its own:
- Acquiring land and turning it into an urban farm, farmland, or cropland if it’s not presently being utilized for agriculture: The biggest return may be expected from converting farmland since an investor can probably buy the property for less money, which allows them to receive a larger cash yield and possibly profit from greater land value appreciation. However, this option involves the greatest labor, as an investor would have to convert the land to farming usage and locate the appropriate tenants and crops for the region.
- Buying a farm or other piece of agricultural property and renting it to a new tenant: An investor could receive a larger return if they choose this option. However, finding the ideal renter for the farm would probably require more work upfront.
- Buying an existing farm through a sale-leaseback arrangement, where the present farmer keeps working the land and pays the new owner rent: The least risky and most passive option to directly invest in farms would probably be through a sale-leaseback deal. However, in return, a buyer of the land could have to pay a larger sum, resulting in a lower cash yield.
A crowdfunding website called AcreTrader gives certified investors easy access to farms. The minimum investment requirement for the majority of its products is 10 shares, which is equal to one acre of land, which typically costs between $3,000 and $10,000 per acre. Investors own shares in a Limited Liability Corporation (LLC) which owns the legal title rather than the actual acreage of the land itself.
3. Invest through a farming-specific crowdfunding site
In recent years, a number of businesses have emerged to offer online access to farmland assets. The majority of such farmland crowdfunding platforms, however, are only accessible to accredited investors, who are defined as having a high net worth of at least $1 million, exclusive of the capital in their principal home, or a high income of at least $200,000 over the previous two years, and $300,000 if married.
FarmTogether is a digital farmland investment marketplace. It offers prescreened U.S. farmland investment possibilities to authorized investors directly. Investors have the option of making direct investments in particular farms or in a portfolio that holds many farm holdings.
Steward is a platform for crowdfunding with an emphasis on purchasing sustainable farms. It tries to give farmers money (in form of a loan) so they may maintain and grow their crops. With a modest minimum investment requirement of $100, its debut product, the Steward Farm Trust, will be accessible to all investors and will hold a portfolio of loans available to farmers.
6. Farmland LP
The primary objective of Farmland LP is to purchase commodity farming and turn it into more desirable organic farmland. It gives accredited investors the chance to take part in a private equity fund with the option of eventually turning into a REIT and being publicly listed.
7. Buy shares in specialty REITs
There are now two publicly listed (REITs) real estate investment trusts that concentrate on buying farmland and renting it to farmers:
- Farmland Partners (NYSE: FPI).
- Gladstone Land Corporation (NASDAQ: LAND).
The largest publicly listed agricultural REIT in the United States is Farmland Partners. It possessed assets worth around $1.1 billion as of mid-2019, comprising 158,000 acres of land spread over 17 states. More than 100 tenants who grow 26 different crops, including 57% of row crops (cotton, rice, corn, and soybeans ) and 42% of permanent and specialized crops, were given the lease to use this land (vegetables, non-tree fruit, wine grapes, avocados, and almonds).
In contrast, Gladstone Land controlled 111 farms totaling 86,534 acres across 10 states, worth $876 million. It largely focuses on agricultural land that is used to cultivate nutritious foods, including nuts, vegetables, and fruits.
These agricultural REITs are the most accessible and affordable option to invest in farmland since they are open to every investor having a brokerage investment account as well as enough money to purchase one share. They do, however, face some market risk because they transact on stock markets.
Why Should You Buy Farmland?
Farmland has a reputation for delivering reliable returns for investors, which is the key reason why more of them are turning to it as an investment option. There are two types of returns:
- Crop yields or rent payments in cash
- Increases in the value of farmland
American farmland has increased in value by around 6.1% every year during the past 50 years, with only five years of decline. Even more spectacular returns have been received by investors when cash rent yields are included.
According to the USDA, farmland has generated an average yearly return of 11.5% since 1991, making a profit each year. With the exception of the Dow Jones REIT Index, it has exceeded all other types of assets throughout that time period, to put this return into context.
Aside from the potential for above-average overall returns, owning farmland offers investors a number of other advantages:
- Long-term returns: If a farmland plot is located in a region in which the government has infrastructure projects planned for the near future, it can assure long-term profits.
- Low volatility: Historically, the volatility of farmland returns has been lower than that of the majority of other asset classes, such as US Treasury Bonds of 10 years, gold, the Dow Jones REIT Index, and the S&P 500.
- Inflationary hedge: Farmland is a valuable resource that yields goods like grain and corn. As a result, it gains from inflation because it would raise crop income as well as acreage values. Because of this, some people refer to farmland as an investment that yields like gold.
- Low correlation: Generally speaking, farmland returns don’t follow the same trend as those of the stock market. In numerous years when the S&P 500 has seen a decline in value, farmland has generated a profit.
Farmland has often made profitable investments. Unfortunately, due to the high initial cost of purchasing farmland, not many buyers have been in a position to profit from this asset type.
That has improved recently, though, as a result of the emergence of new options like REITs and crowdfunding platforms for agriculture. As a result, American farmland is now considerably more affordable for investors to purchase, making it a more widely available asset class.
If you have farmland that you need to sell, we’ll help you sell your land quickly without listing fees, and you’ll get a free, no-obligation cash offer. Why not give us a call today?