Farms are the backbone of our nation. Therefore, it makes sense that farmland is the backbone of many lucrative real estate investment portfolios.
With its attractive tax advantages and resilience during economic uncertainty, agricultural land is an investment option worth a closer look. Although equities, residential properties, and commercial real estate tend to get the spotlight, they can be volatile investments. While volatility is not a bad thing per se, agricultural land is becoming the choice for investors wanting long-term, steady, reliably consistent gains.
Let’s take a closer look.
Is Farmland a Good Investment?
Over any given period, farmland is going to have the least volatility among other real estate investments, making it a relatively safe place to keep capital. One of the reasons for this is a basic economic truth: people need to eat. Since it is always going to be needed, farmland will remain a productive investment.
Continuing along a theme of fundamental economics, farmland is a limited resource—they aren’t making any more of it. It is always going to have value. As farming techniques improve, that land is going to become even more productive. Investing now means you get to take advantage of the increasing productivity of limited arable land.
This intrinsic connection between the law of supply and demand and food production means that it is not likely that a given parcel of farmland will ever lose value. In most parts of the U.S. and Canada, you can expect agricultural land to outpace inflation. In fact, farmland is arguably one of the most inflation-resistant investment choices you’ll find.
Return on Investment in Farmland
If you’re on the fence about investing in farmland, the promise of stability may be enough to tip the scales and compel you to take action. But you’re an investor. You don’t just want stability; you want your investment to grow. So you may be asking the question, “What kind of returns can I expect from farmland?”
A smart investor can expect dependable returns from both land value appreciation and the income from the land itself.
More so than with other forms of real estate investment (and more generally almost all other types of investment) there is a greater time period needed to see appreciation in land value. Crops and livestock take time to grow, and in the same way, farmland takes a while before its value increases.
Farmland investing is a “long haul” proposition. You’ll need to find the right ways to meaningfully add value to the land before selling for a higher price. For the short- to medium-term, you can expect returns on your investment through direct income. This could be in two forms: simple rent from a farmer/operator or via direct hands-on operation of the farm. Which income stream you rely on depends on the level of involvement you can handle.
In other words, if you aren’t interested in doing any farming yourself, you can generate income from the operation of the farm by leasing the farmland to a farmer or rancher. This converts the operating income to a rental income stream, which can be paid in cash or as a share of the farm’s production value.
Combined with the appreciation of the land value over the same period, the dollars can start to stack up.
Tax Advantages of Investing in Farmland
Taxes are something every investor keeps in mind, so farmland’s tax advantages are worth pointing out. Uniquely, agricultural property owners can lower their tax burden by claiming depreciation on certain crops (particularly fruit and nut trees). And like other businesses, you can also build or make improvements to the property—expenses that can be deducted from your gross income.
Farmland generally gets favorable tax rates in all states due to policies prioritizing agriculture. Your farmland may even be declared a conservation trust. Preserving the land as farmland will provide even more tax advantages in every state.
How to Invest in Farmland
If you haven’t guessed already, farmland is a unique type of investment. Keep two key things in mind. First, it requires stringent financial planning to invest. And second, investors need a basic awareness of the type of farm they are looking to invest in.
You don’t need to have a ton of capital to get started. Crowdfunding is an option. Fundrise is a real estate crowdfunding platform for non-accredited investors that you may want to check out. Also, you could go into partnership with other investors to purchase shares in a farm.
Another idea to consider is to passively invest in part of the operations of a farm. All it takes is a little preparation and creativity as you look to invest.
Remember, you don’t need to know anything about raising crops to be a farmland investor. But it does help to do some homework so you can properly assess risk against the potential for returns.
The Bottom Line
All of the tax advantages, combined with investment potential, cumulatively create a strong case for investing in farmland. Like other forms of real estate, farms have their quirks. Investigate the land, secure proper financing, and evaluate future potential growth.
The bottom line is agricultural land is a relatively stable, potentially lucrative investment in all economic climates, so don’t overlook it when you’re looking to add another element to your real estate portfolio.
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