Real estate isn’t a new investment, but crowdfunding and REITs offer new ways to take advantage of the market. Beyond rental properties and commercial buildings, farmland has become an increasingly popular real estate investment option.
Like all property investments, farmland is likely to appreciate in value over time and it can provide rental income. In addition, some farms provide crop income. Investing in a farm is an appealing idea, but there are several unique considerations to keep in mind.
The upsides of investing in farmland
Returns
According to Acretrader, U.S. farmland has averaged a 12.24% annual return over the last 20 years. The crowdfunding site tempers the future outlook a bit, but it still claims that farmland can offer an 11% annual return.
Contrast that with a 9.775% return for the S&P 500 over the last 20 years and investing in farmland looks somewhat attractive. Farmland is generally less volatile than stocks, as well. Add in the potential for crop income or distributions, and it looks even better.
Diversification
One of the core principles of investing is to diversify your portfolio. Because of the risks involved with the stock market, investors have always hedged their investments with bonds or other stocks.
Real estate, and farmland, can provide diversification that isn’t tied to the market’s ups and downs. But it’s important to remember that real estate prices fluctuate as well.
Possible tax implications
There are a number of tax benefits that real estate investors can take advantage of. From depreciation benefits to tax-deferred gains, be sure to understand what deductions apply to your situation.
The downsides of investing in farmland
Liquidity
Aside from REITs, which we’ll discuss later, there is very little liquidity in farmland investing. You are tying up your money for years at a time, even as much as 10 years. The length of the investment window can be a barrier to entry for many investors.
Investment costs
Buying a farm directly, or even crowdfunding, can be very expensive compared to an investment in the stock market. Considering some crowdfunding properties start out with a $10,000 dollar minimum investment, many investors will be priced out of the market.
No tenant
Owning farmland without a farmer means you’ll miss out on precious rental income and possibly crop income. Another set of issues arises if you have a farmer who either can’t or won’t pay their lease. Crowdfunding sites can mitigate this risk, but even then the lack of a tenant can still reduce your property’s value.
Weather
Whether it’s a tornado or a drought, the weather has a more significant effect on the farming industry. It can hamper crop income, which in turn can affect your farmer’s ability to pay the rent.
Three ways to invest in farmland
Direct Purchase
The traditional way to invest in real estate is to buy it yourself. You can directly profit this way, but it also requires direct supervision. You could buy a farm and operate it yourself but, in most cases, investors buy the land and lease it out to a farmer.
Crowdfunding
Crowdfunding sites like Acretrader and FarmTogether are able to take over most of the legwork of buying and leasing property for you. These companies handpick farms, purchase them, and then split the ownership into shares that investors can buy. While this makes for an attractive investment it is still not an option for many investors.
REITs
Investors who don’t have the capital or the time to buy farmland themselves or through crowdfunding can still invest in farmland through a Real Estate Investment Trust (REIT). REITs are investment vehicles that can be bought and sold on the market like a stock. You invest in a group that holds multiple properties, and you often don’t know which farms you own.
Purchasing farmland directly
Most investors who buy farmland outright will be non-operator landlords, meaning they won’t be producing crops themselves. As a non-operator landlord, you make your money through rental income from a farmer and/or income from the crops the farmer produces. Of course, you can also make money by selling the property at a profit.
The benefit of buying a farm outright is that, if you invest wisely, you can pocket all the profits. One downside is the work involved in researching a property and purchasing it. Another is that you’ll have to find a farmer who can produce reliable income and you’ll have to deal with any issues on the property.
For most investors, the capital and the time required to buy a farm means that purchasing farmland directly is not an option.
Farmland crowdfunding overview
Crowdfunding platforms offer investors the chance to buy a portion of a farm without the headache of direct management. Through the platform, you’ll buy a share and hold it for a specified time period, usually 5-10 years. You profit when the property is sold but you can also make money along the way from distributions, which typically come from crop income.
Crowdfunding upsides
A major benefit to crowdfunding is that you don’t have to research which farm to buy. The platforms use rigorous standards to select the properties themselves. The companies will also manage relations with any tenants, making this type of real estate investing very low-maintenance.
Even though the crowdfunding platform handles most of the legwork, you’ll still have a choice of the property you invest in. Crowdfunding sites will generally provide one or two properties a week with different locations and different crops, so you’ll know what you’re buying.
Crowdfunding downsides
The major downside to crowdfunding is that, at the time of this writing, you have to be an accredited investor to participate. According to the SEC, the three main ways to become an accredited investor are:
Have income exceeding $200,000 for each of the two prior years (or $300,000 with a spouse or partner), and you expect to earn that much this year
Have a net worth of over $1 million, excluding your primary residence
Have a license as an investment professional
Aside from that, the other big downside to crowdfunding is your investment is illiquid. AcreTrader offers a limited marketplace where you may be able to sell your shares, but, according to their website, you should assume that you are buying and holding until the property sells.
Many crowdfunding platforms also charge management fees and closing costs, so be aware of any additional fees that accompany your investment.
Crowdfunding example
At the time of this writing, Acretrader had a single property available for investment. This is a timber tract in Arkansas that requires a $17,325 investment for a single share. The target hold period is 5-10 years.
Looking at some of the exited investments on the site, many of the properties were only actually held for 1-2 years, though this is not a guarantee of future performance. The IRR ranges from 11.4% to 30.3% on these properties. That sounds pretty good if you’re in a position to invest.
Farmland REIT overview
Because of the costs and the illiquidity of crowdfunding investments, REITs are the only option for some investors. Farmland REITs are created by groups that own multiple properties and offer the chance to own part of the group. REITs are a security that can be traded in the market just like stocks.
REIT upsides
The major benefit of farmland REITs is that you don’t have to be an accredited investor to invest in them. Anyone with a brokerage account can purchase them with the click of a button, and they are just as easy to sell.
They also provide additional diversification because they invest in a group of farms instead of just one. And they can even pay dividends like a stock.
REIT downsides
Though REITs are not technically stocks, they are still affected by the ups and downs of the market as if they were. That means they are more volatile than crowdfunding or buying direct, and you still may not see the same gains as stocks.
Because there are multiple farms owned by the group, it can be hard to know what you’re actually invested in. You have to research to find out what you own, and you lose the personal connection with your farm.
REIT examples
There are two main farmland REITs: Gladstone Land Corporation (LAND) and Farmland Partners, Inc. (FPI). LAND is up 50.08% over the past five years, but is down 37.33% over the past year. LAND also offers a dividend yield at 2.93%.
FPI offers a 1.88% dividend yield. It is up 71.18% over the past five years, with a one-year return of 15.99%. FPI has performed better than LAND, largely because FPI has been more aggressive in acquiring more farms. As always, do your research before investing in a farmland REIT.
Should I invest in farmland?
The main benefit of investing in farmland is to diversify your portfolio and make passive income. If you’re willing and able to buy a property directly, farmland can be a solid alternative to commercial real estate due to its potential crop income.
If you’re an accredited investor and you’re comfortable with a long-term investment, crowdfunding can be a great alternative to the stock market. These platforms eliminate the need to find and maintain the farm yourself.
For the average investor, the only way to invest in farmland is through one of the two farmland REITs. Do your due diligence and invest if you feel there’s an opportunity for future growth.
For most investors, farmland is not a feasible alternative to investing in stocks and bonds.
Written by:
Wesley Grant is a business and personal finance content writer who has worked with leading brands from across the globe. His passion is creating valuable content that will inform business owners and educate consumers. Wesley earned his MBA from the University of South Carolina.
