[Guide] 4 Things to Know About Investing in Farmland

Farms are an essential part of our economy, so adding farmland to their investment portfolio makes sense for many investors. Most of us don’t have the capital, time, or dedication required to start our own farms, but there are other options for investing money in farmland. Learn more about how to invest in farmland.

What is farmland investing?

There are more than 2 million farms and almost 900 million acres of farmland in the U.S., according to the United States Department of Agriculture. As of the 2017 Census of Agriculture, about 60% of U.S. farmland was owner-operated, which means that the farmer working the land also owns the property. About 40% of farmland is rented, which means the farmer doesn’t own the property, and most rented land is owned by non-operator landlords such as investment groups.

This means you have the opportunity to invest in farmland in a few different ways, but there are some important things to know first.

6 things to know about investing in farmland

Farmland is considered an alternative investment, and it works a bit differently from other asset classes such as stocks and bonds. Farmland can be a solid portfolio diversifier for some investors. Here’s what you need to know.

1. You can make money in multiple ways

There are several ways you could make money from investing in farmland. Perhaps the two most basic ways are from the land value appreciation potential and any rent received from the farmer working the land.

For those who are able to do so, buying and holding farmland can be an option. The value of farm real estate has historically increased over time, so you could buy cropland or pastureland now, rent it out, and sell it down the road, potentially making a profit.

For those investors who also work their own farmland, there could be revenue from the sale of the crops they raise or from livestock that use the land for grazing.

2. It can be an active or passive investment

Farmland can be an active or passive investment. An active investment might mean buying the farmland and working it yourself to raise row crops or other agricultural products.

A passive investment would be similar to investing in any other type of real estate. You can simply buy the farmland, rent it out and enjoy the passive income, and hold it until a later date when farmland values have increased, then sell it at a profit.

You could also land somewhere in the middle and work part of the land and lease the rest to a farmer, a real estate investor, or someone who wants to develop the land for another purpose.

There are IRS rules regarding what constitutes an active or passive investor, as well as material participation in a business, which is being involved in a business on a regular, substantial basis. These rules will determine how your investment in farmland is taxed.

We suggest you consult a tax professional knowledgeable in this area to ensure that you adhere to any applicable rules differentiating between active, passive, and material participation if applicable to your situation.

3. It has historically low volatility

Farmland has had a historically low rate of volatility compared to some other types of investments. Volatility is how much a price changes over time. Low volatility means fewer price swings and more stability.

For example, from 1992 through 2020, a farmland index showed 6.9% volatility. During the same period, the S&P 500 index had 17.15% volatility and U.S. bonds had 4.55% volatility, so farmland has been much closer to bonds than stocks when it comes to price stability.

4. It could be a hedge against inflation

Real estate, in general, is considered to be a hedge against inflation. In other words, it’s an investment with returns that could keep up with or exceed the rate of inflation. This is because real estate is a finite commodity as there is no more land being created. As it’s finite, its value has more likelihood to increase over time.

This holds true for farmland, perhaps more so than other types of real estate, as the global population keeps growing, which means demand for food is increasing. As urban and suburban areas move further out, new developments are often on what used to be farmland, which reduces the supply of farmland.

In fact, from 1960 to 2012, farmland proved a better hedge against inflation in many years than did gold, an asset often cited as a solid inflationary hedge.

5. It’s not great for liquidity

Real estate of any type is not a highly liquid investment. Liquidity is your ability to turn an asset into cash. Unlike with an investment in stocks, bonds, ETFs, or mutual funds, there is no daily liquidity in real estate. The exception to this is an investment in a real estate mutual fund or ETF. In some cases, publicly-traded REITs may provide this type of liquidity as well.

In the case of investing in physical farmland, like any other type of physical real estate investment, you must find a buyer for the property. Depending upon the supply and demand for farmland in the area, this might be a quick process, or it could take weeks, months, or longer. Besides the general supply and demand for farmland, there may be specific aspects of your property that make it more or less desirable to a prospective buyer.

In some cases, investing via a crowdfunding platform, a private equity farmland real estate fund, or another private investment vehicle may be illiquid in that there may be restricted periods during which you cannot access your investment. These restrictions are referred to as lock-up periods.

Before investing in farmland, either as a direct land purchase or via a private fund or pooled investment, be sure to take this lack of liquidity into account. You will need to determine whether or not you will need access to the money you are looking to invest or if these funds can be tied up in the hope of a solid return when you ultimately do liquidate the property or your investment in a fund.

6. Expert knowledge may be required

If you’re planning to buy land directly, you’ll want to consult experts to determine its value and your options for working the land you buy. You may not have a working knowledge of crops or livestock or how to make your investment profitable. It’s important to consult people with expertise, so you make the most of your investment.

How to invest in farmland

If you want to buy physical land...

Another variation on farmland as a passive investment is purchasing farmland and then leasing it to farmers who would work the land.

Here are a few ways to rent out physical land:

• Sale-leaseback: A sale-leaseback transaction involves buying the farmland from a farmer already working the land and then leasing the use of the land back to the farmer. Investors with a low risk tolerance might prefer this arrangement as the tenant farmer is already working the land, likely has a stream of income, and will have received your payment for the land. Generally, these types of arrangements will carry a relatively high cost for the buyer of the land, but you could have ongoing cash flow relatively quickly.
• Buy and rent: You can also purchase existing farmland and rent it to a new tenant farmer. This requires a bit more work as you will need to find and vet a new farmer to rent the land. You will want to understand their experience as a farmer and look at any other farming operations they might be engaged in.
• Converting land and renting it out: You could also acquire land not currently used as farmland and convert it to agricultural use such as farming, pastures, or urban farming. This is a more involved process in that you may need to obtain permits to convert it to a farming-related use. There may also be work in transforming the physical land in order to be used for farming. Lastly, you will need to find tenants and properly vet them. This is the riskiest of the three options, and you will want to purchase the land at a favorable price to help ensure a profit on your investment.

It pays to understand how to invest in real estate in contemplating an investment in farmland.

If you don’t want to buy physical land...

For those who want to invest in farmland but don’t want to buy physical land, there are a number of options.

Farmland Partners (FPI) is a publicly-traded REIT (real estate investment trust) that trades on the New York Stock Exchange. It is essentially a stock like Apple, IBM, or any other stock. According to its website, it “seeks to acquire high-quality farmland throughout North America addressing the global demand for food, feed, fiber, and fuel.”

Gladstone Land Corp (LAND) is another publicly traded real estate company whose primary business is owning and leasing farmland. Its shares are traded on the NASDAQ.

ETFs are pooled investments that track an index, commodity, or another type of asset and are traded on the stock market. Several ETFs invest in agriculture-related businesses, but not necessarily farmland exclusively. Examples include the VanEck Agribusiness ETF (MOO) and Teucrium Soybean ETF (SOYB).

Publicly traded REITs, ETFs, and mutual funds investing entirely or in part in farmland are available to any investor. They also have relatively low minimum investment requirements compared to other options. Other types of pooled funds investing in farmland may be restricted to accredited investors who meet the government’s requirements for income and assets. These funds also have higher minimum investment requirements.

For example, FarmTogether is a fintech platform that allows accredited investors to invest in agricultural land shares, including farms, orchards, and other farmland properties. It has several account types available, including self-directed IRAs and individual accounts. You can choose which properties you invest in, and you can own fractional shares or entire parcels.

For more details, read our FarmTogether review.

There are also a number of crowdfunding platforms that focus on farmland and related properties. Real estate crowdfunding is typically a group of investors who pool their money together to buy into one or more specific real estate deals. This works the same way for farmland crowdfunding. Farmland crowdfunding platforms will generally be limited to accredited investors.

Some examples of the best investment apps and farmland crowdfunding platforms include:

• AcreTrader
• FarmFundr
• FarmTogether
• Farmland LP
• Harvest Returns
• Steward

Crowdfunding platforms and REITs focusing on farmland have opened up access to farmland as an investment to many more investors in recent years.

FAQs

Bottom line

Farmland investments are now available to more than just institutional investors. Buying farmland could be good for diversifying your portfolio, but make sure you do your homework and due diligence. Invest in the way that makes the most sense for your risk tolerance and goals.

Farmland is probably not right for novice investors. There are a lot of moving parts, and it makes more sense for experienced investors. It can pay to work with an advisor who is knowledgeable and experienced in this type of investing. If you’re looking for other unique investment opportunities, learn more about strange things to invest in.