Farmers don’t typically own the land they manage, believe it or not. This means there are plenty of investment opportunities for those with the capital to buy farmland. But what if you don’t have a large amount of capital necessary to buy the land?
Not many of us have millions of dollars to buy farmland. I know I don’t. So, how can we profit?
Anyone can take advantage of the positive returns farmland offers by investing in a farmland real estate investment trust (REIT). The good news is anyone is eligible, and you don’t have to be an accredited investor.
It can be a great way to diversify your portfolio. Here’s how a farmland REIT works.
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What Is a Farmland REIT?
A farmland REIT is an indirect investment in farmland. You don’t have to own farmland directly or be a farmer yourself, but you can enjoy the dividends owning farmland creates.
A farmland REIT is a company that holds farmland that the investors finance in the REIT. Farmers (not the investors) rent the farmland from the REIT. The investors earn dividend payments based on the rent paid.
It’s an indirect way to invest in farmland without putting up millions of dollars in capital or taking significant risks.
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How Does a Farmland REIT Work?
A farmland REIT is as close as you can come to owning farmland without getting out in the field and managing it yourself.
You invest in farmland REITs in any increment, as long as you meet the minimum investment requirement set by the REIT. For example, if the REIT doesn’t have a minimum requirement, you could invest $10 or $1,000 — any amount you can afford.
This makes it easy to diversify your investment across many pieces of farmland. Just like when you invest in stocks, you shouldn’t put all your eggs in one basket. Spreading your money across several farmland investments lowers your risk of a total loss should one farmer get into financial trouble.
Farmland REITs are also liquid. You can buy and sell them like you would shares of stock on the stock market. If you need your money back fast, you don’t have to worry about liquidating farmland, which could take years. Instead, you sell your REIT at the current market price and get your investment back.
Pros and Cons of Farmland Reits
- You can own a fractional share of farmland rather than directly investing and operating farmland yourself.
- You can diversify your investment across several farmland REITs to lower your risk.
- You don’t have to manage property but get to earn part of its profits.
- You don’t have to make difficult decisions about managing the property.
- Farmland REITs are publicly traded, and you can trade them during market hours like stocks.
- The farmer can mismanage the farmland, causing you to lose your investment.
- REIT income is taxed as ordinary income rather than capital gains (higher tax rates).
- You’re at the mercy of management regarding who they rent the farmland to.
Top Farmland REIT Investments
Farmland Partners is a medium-sized farmland REIT with a market cap of $400 million. Today they own over 150,000 square feet of land in over 16 states. They have over 100 tenants that grow a variety of row crops and specialty crops.
Today, Farmland Partners trades at $11.65, making the barrier to entry for new investors very low. Without the need to come up with millions of dollars to invest in farmland, anyone interested in investing can earn a piece of the pie, so to speak, by investing in Farmland Partners.
Gladstone Land focuses its investments on fruit and vegetable farmland in areas with a high demand for farm rental and experienced farmers. Today, Gladstone owns over 115 farms in 10 states throughout the United States.
Gladstone farms are diversified with various crop types, so investors aren’t subjected to a total loss should a disease or weather wipe out a specific crop. Gladstone pays monthly dividends and has an average dividend yield comparable to other farmland REITs.
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Alternatives to Own Farmland
In addition to farmland REITs, there are other ways to own farmland, including the following.
Buy farmland directly
You need a large investment and the know-how to run a farm to buy farmland directly, or you’ll need to find farmers to rent the land. Essentially, all the work done by the farmland REIT company would be on your shoulders instead.
There are a few ways to buy farmland, including:
- Buy it directly from a farmer and find new tenants to lease the property from you.
- Buy the property from a farmer as a sale-leaseback and let the farmer continue operating on the farm while you own it.
- Buy a property that you convert to a farm and lease out to farmers
Invest in farmland crowdfunding
If you’re an accredited investor, you may be able to invest in farmland crowdfunding. This means you may invest in the debt (lending farmers money to buy the land) or the equity — earning a portion of the farm’s sales.
Crowdfunding has many more limitations and requirements, including a minimum investment both by dollar and number of shares. Like REITs, you can diversify your investment, but not as easy since the investment minimums are much higher.
The Bottom Line on Farmland REIT Investments
Don’t let the high upfront investment required to buy farmland steer you away from this investment opportunity. There are ways to pool your money with other investors so that ordinary people can invest in farmland and make a profit too.