In our previous post, Different Ways to Invest in Land, we explored the primary ways of investing in farmland (like buying whole farms, REITs, Private Equity, and direct investments). Here, we’ll discuss why investing in farmland may make sense for you, and how to invest in farmland online via an investment platform such as AcreTrader.
Why Invest in Farmland?
Most LANDTHINK readers appreciate farmland as an investment already, but many may be surprised to learn that farmland has outperformed most major asset classes like stocks, bonds, and even real estate. In fact, U.S. farmland has produced average annual returns of almost 12% for nearly 30 years. Importantly, these returns were produced with less volatility, or annual changes in value, than most other asset classes as well. This is because farmland investments are typically made without using debt, thus it has been less “risky” than other levered assets.
Two sources of income
Farmland has produced investor returns from two main sources: 1) the value of the land going up over time, and 2) annual distributions from the farmer renting the land (or directly from crops grown on the land). These returns fluctuate each year, but when combined, they can create a very attractive return profile for farmland. Other income streams are also available depending on the farm. These could include hunting leases, energy leases to solar and wind companies, or even revenue from billboards for farms with highway frontage.
Through the appreciation of land values and annual rental income, farmland has provided investors positive returns every year for almost 30 years. For example, consider a piece of farmland in the Midwest. Assume an annual cash rent of 4% and annual growth in land value of 6% (the long-term average). The total annual return would be around 10%. For stable and productive row-crop farms, this would be considered normal long-term returns. This point can be further understood when comparing the performance of farmland with other major asset classes, as demonstrated in the chart below. While farmland rarely has a breakout performance in any given year, it has provided investors consistent positive returns without the volatility profile of other investments.
Farmland investment gains above don’t include the use of much, or any, debt to amplify returns. Thus, long-term annual average returns of nearly 12% have been realized without the extra risk created from the use of leverage. Some farms do have debt, but it is usually much lower loan-to-value ratios than typical real estate property investments. If focus on 2007-2009 in the chart above, you can see how this affects returns. Even in times of recession when the S&P 500 dropped 37% (2008), farmland has been able to produce positive returns.
The historical returns cited above have shown farmland to be a great investment in its own right. Aside from the high annual returns, farmland investment performance is not heavily influenced by the movement in other asset prices like stocks, bonds, and gold. This is another benefit of investing in farmland: low correlation to most other major investment classes. For example, the chart below shows annual returns of farmland vs. the annual movements in the S&P 500 (a primary U.S. stock index). As can be seen, the swings in stock market prices have had almost no influence on farmland investment returns. This is one of the many reasons money managers see farmland as a great portfolio diversification tool.
Investing in Farmland Online
Investing in farmland can be difficult. Until recently there were very few ways to invest in farmland, all with distinct drawbacks. Most investors do not have the amount of capital, time, and experience necessary to purchase and manage a whole farm, so despite the attractive investment profile of farmland, it hasn’t been widely recognized as an investment alternative. Even when investors or farm owners do have the ability to purchase entire parcels of land, it is typically concentrated in one area.
AcreTrader was created to make it easy for investors to own shares of farmland and earn passive income, starting in just minutes with an online account. Investors can invest in individual parcels of land, and relax while AcreTrader takes care of all administration and management of the property.
How AcreTrader Works For Investors and Farm Owners
AcreTrader is an online marketplace connecting investors and farmland. It helps investors gain access to farmland investments without purchasing an entire farm. With as little as $5,000, an investor can purchase shares of a farm and earn income from rents plus any increases in farmland values over time. The farmland acquisition team at AcreTrader does extensive research on each farm before it goes on the website – ultimately looking for land with great water, great soil, and a great financial profile for investors.
In addition, for farm owners looking to sell some land, AcreTrader can also help by sourcing investors to sell land to. Beyond being a source of capital, AcreTrader and its investors can be flexible with things like sale-leaseback arrangements and investing in improvements in the land. Learn more about how AcreTrader works with farmers.
In summary, farmland has been an incredibly attractive asset class due to the two sources of value that it provides investors. It has also been a great portfolio stabilizer for investors due to its low correlation with other major asset classes and continued growth during recessions. Historically there have not been many opportunities for investors to own farmland aside from buying and managing a farm themselves. An online platform such as AcreTrader makes investing in farmland more approachable for the vast majority of investors
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