While there is no shortage of potential ways to invest your money, farmland is a popular alternative investment that you might want to consider. While traditional real-estate investments may be more common, there is a lot to like about farmland as an investment, including the potential for strong long-term gains.
There is a limited supply of land, and we can’t produce any more, so many investors like the idea of getting a piece of the action and owning a slice of farmland. However, this can seem like a daunting prospect for many investors, so here we’ll explore the ways you can tap into this market and add farmland to your investment portfolio.
Why Invest in Farmland?
We all need to eat, so investing in farmland can be a good strategic move. Regardless of whether the economy is booming or in recession, there will always be a demand for food, and there is a limited supply of land. It is this fundamental foundation that means that many investment experts consider farming and agriculture investments to be at least somewhat recession-proof.
Farmland has a positive relationship with inflation, acting as a classic inflation hedge, so many investors consider it more favorably than many other hard assets, including gold. This is because farmland will produce positive cash flow while shielding investors from the potential damaging inflation effects.
There is a decreasing supply of land in the U.S, which is another encouraging sign for investors, and farm investment can earn money from stability, appreciation, and even rent (making it an income-producing asset).
All of these factors make farmland a solid investment, but this is balanced by a need to take a longer-term approach. While you’re unlikely to make a quick profit from your investment, it could yield impressive returns for your long-term financial goals.
Ways to Invest in Farmland
Despite the impressive potential, buying a farm simply isn’t a feasible strategy for average investors. In terms or rental potential, most smaller farms will not generate that much for the landowner.
This means that you’ll need the capital to be able to purchase many acres of land in order to have a solid asset for renting to farmers. As a result, most investors are not in a position to purchase a farm that will serve as a good investment from a rental income perspective.
Fortunately, there are some great ways that you can enter the farming investment sector without needing to sink all your money into a physical farm and without actually owning the farm yourself. Let’s take a look at some of the options.
The simplest way to enter the farming investment sector is through crowdfunding. You’re probably familiar with some of the more popular real estate crowdfunding platforms that allow investors to reap the benefits of real estate investing without the need to own or manage the property themselves. But you may not be aware that there are several crowdfunding platforms that specialize in farmland and agricultural land.
Before you jump into the world of farmland crowdfunding, there are a few things that you need to know. First, under the federal securities laws, certain security offerings are only open to accredited investors, and this includes all of the current crowdfunding farming and agricultural platforms. This is to ensure that all the participating investors are financially aware of and able to sustain any potential risks.
For individuals, accredited investors need to earn $200,000 annually in the two prior years and reasonably expects this level of earnings for the current year or have a net worth of $1 million excluding the value of a primary residence. There are other categories, which include any trust with assets over $5 million.
Since most investors will not meet the requirements to qualify as an accredited investor, these farmland crowdfunding platforms will not be an option for most investors.
Currently, the farmland crowdfunding options all involve investing in a specific property. Hopefully, one of the platforms will adapt and offer a portfolio approach that allows all investors, not just accredited investors, the opportunity to invest in a portfolio of farms and agricultural properties. This would be essentially the same thing that Fundrise has done for real estate investing.
The second thing you need to be aware of is the fact that these investments typically generate a return for investors in two different ways:
- Rental income from leasing the land to farmers
Typically, these are considered to be long-term, illiquid investments. In order to be able to capitalize from appreciation, no specific term for the investment can be determined ahead of time. Instead, the land will be sold (ideally) for a higher price whenever the market conditions are right.
You’ll probably need to wait several years to realize the full return from your investment, which means it may not be ideal for everyone.
Some of the best farmland crowdfunding options include:
AcreTrader is a dedicated real estate investment platform that offers income-producing shares of farmland. You can earn money through annual rent payments from the tenant farmers and the long-term appreciation of the land itself.
The platform is relatively new and has only been trading since 2018. However, AcreTrader has a niche, equity investment in farmland, which makes it stand out from the crowd of other crowdsourcing platforms.
Currently, AcreTrader offers only Reg D investments. The company intends on offering Reg A+ investment in the future, which will open up its services to any investor.
AcreTrader investment means that you will receive a membership interest of the entity holding the property title. In simple terms, each share is a representation of 1/10th of an acre of farmland.
AcreTrader has a transparent fee structure that is confirmed at the time of investment. You can expect to pay 0.75% annual fee that is based on the value of the land, and there are also various closing and administration fees at the time of your initial investment. The primary revenue fee is charged to the seller of the land of the entity owning the land at the arrival of the terminal date. Of course, you will need to review the specifics of the investment so you can confirm that you understand all the fees involved.
AcreTrader states that the rental yield is typically 3 to 5 percent, and you could expect 7 to 9 percent in appreciation. The rents are typically paid annually.
FarmTogether provides investors the access to U.S farmland investments. The platform provides a single location to browse potential investments, review due diligence, and sign legal documentation securely online. The company provides access to due diligence documentation and thoroughly underwrites each investment.
The investments are structured as an interest in a special purpose entity that owns the farmland directly. This allows investors to be the ultimate beneficial owners of the farmland, while FarmTogether is responsible for the overall management, including oversight and reporting.
Investments vary from $10,000 to $50,000, but you can arrange a call if you would like to invest a different amount.
You can expect to receive returns on the land appreciation at the end of the deal hold period, but lease payouts are typically made on an annual, semi-annual, or quarterly basis. These payments are automatically deposited in your bank account, and the size of the distribution will depend on the negotiated lease payment. However, the platform does allow you to track any upcoming lease payments and the distributions made to date.
Unlike some of the other crowdsource options, FarmTogether can also assist you to locate a buyer if you need to liquidate your investment before the end of the hold period. However, this is likely to attract a discounted investment amount and transaction fees.
American Farm Investors
American Farm Investors create syndicated farmland investments, locating profitable farms to purchase and efficiently managing them to maximize potential. Through American Farm Investors, you can invest using cash, 401K, or IRA funds, and the company advertises that you can expect 2 to 5 percent cash on cash returns in addition to the potential for land appreciation.
The team says that the “cash flows are virtually guaranteed” with typical farm rental agreements require the farmers to pay a portion of the annual rent at the start of the calendar year. The current rental rates are 2 to 5 percent of the farm’s value. However, it is anticipated the cash flows will increase in the coming years.
Harvest Returns makes it easy to invest in farmland. Once you create an account and set up your basic profile, you can start to browse the investment options. Simply click on an investment, and you can opt to invest as an individual or as an entity.
After you enter your details, including operating agreement and Tax ID number, you can enter the investment amount before you review and sign the documentation. You can even invest using a self-directed IRA.
Unlike many dedicated farmland crowdsourcing platform, Harvest Returns allows prospective investors to visit a project. You will need to receive prior approval, but you can see the physical site for yourself before you invest.
FarmFundr.com is a California-based crowdfunding platform that was founded in 2015. Although the platform offerings are limited, and the minimum investments are typically high, it could offer a good option for investors.
FarmFundr states that the returns on farmland investment through its platform are anticipated to be 13 to 15 percent, with a portion of this amount paid annually. The partial payment is based on the proceed of crop sales with the remainder paid when the property is refinanced or sold.
Currently, FarmFundr has limited options and is only open to accredited investors, but it does offer a good balance of income and appreciation with hold times of one to seven years.
REITs or real estate investment trusts are the closest you can get to actually owning farmland without actually owning a farm. Typically, agricultural or farmland-focused REITs purchase farmland and lease it to the farmers. This provides more diversification compared to buying a farm, as you can invest in multiple locations across a wider geographic area.
Another advantage of REITs is that they offer greater liquidity, and shares of publically-traded REITs can be sold on the stock exchange (not all REITs are publically-traded). Additionally, the minimum investment is only the price of a REIT share, which creates less of a barrier to entry for those who are new to investing.
ETFs or exchange-traded funds are a good way for an investor lacking lots of upfront capital to gain diversified exposure to the agriculture and farming sector. Most ETFs are based on a combination of agricultural commodities such as wheat, sugar, and soy, but there are others that include cocoa, livestock, and coffee. Although it is possible to purchase an ETF focusing on an individual commodity type, there are many that invest in a combination.
Of course, there are still risks associated with investing in ETFs, and you may expect management fees that will eat into your returns, so you will need to carefully assess each package and ensure the performance of the fund index tracks.
Similar to ETFs, mutual funds also offer a mixture of different asset types to diversify investment portfolios. However, mutual funds are actively managed with a fund manager who makes decisions on how assets are allocated within the fund, whereas ETFs are often passively managed.
There are no set rules about whether you should choose ETFs or mutual funds, as it will depend on whether you want to go it alone or have someone help you pick the funds. In either scenario, there are funds for agricultural and farming industries.
Depending on the fund, you may be investing in commodities or agricultural-related companies. In some scenarios, your fund manager may have assets in the fund investing outside the sector. This means that if you want to restrict your investment to purely farmland, this may not be the best route for you.
Like an ETF, you will need to assess the past performance and any applicable fees before you make an investment.
As we’ve shown, if you’re looking to start investing in the farming sector, there are lots of alternatives rather than purchasing a physical farm. If you want to closely replicate the returns of owning a farm, you can purchase a farm REIT, while ETFs can provide wider exposure to the agricultural sector. If you’re an accredited investor, you can explore the crowdsourcing platforms.
All of these possibilities have their own benefits and potential drawbacks, but with all these options, there is sure to be an investment vehicle that will fit your specific needs. However, as with any investment, you need to familiarize yourself with any fees, charges, and other terms and conditions before you commit.
You will need to assess the minimum investment amount, term, and liquidation possibilities to determine which option best suits your requirements. Most of the investment options require a long-term strategy and they won’t help your liquid net worth, so you will need to be prepared to tie up your capital.
Of course, if you’re unsure about the full details of the investment, be sure to speak to a financial expert. An experienced expert can guide you through the terms and conditions to ensure that you fully understand the risks and can make an informed decision.