If you’re looking for ways to increase your net worth, don’t overlook investing in farmland. I know it sounds weird — you aren’t a farmer, so why would you invest in farmland?
Trust me, it’s a great way to diversify your portfolio, and the returns may surprise you! In this article, I’ll share everything I know about investing in farmland.
What does investing in farmland mean?
You probably think of investing in farmland as buying property and farming it yourself. If you’re anything like me, that’s a big no-no.
But that doesn’t mean you don’t want to be a part of the incredible returns farmland offers, right?
Fortunately, it’s easier than you think to invest in farmland. You don’t have to buy the land outright or even work on it. You can invest in farmland with hundreds or thousands of other investors.
Today, there are many ways to make investing in farmland a possibility for accredited and non-accredited investors.
So to answer your question — you won’t own farmland, have to find farmers, and/or operate it yourself. But, you will be able to earn great returns that investing in farmland offers.
Who qualifies to invest in farmland?
Like me, you probably think you have to be rich to invest in farmland. Sure, that doesn’t hurt, but it’s not required.
If you’re an accredited investor, you have more opportunities, but not all of us are accredited. If you’re accredited, it means that you meet one of the following criteria:
- You have an annual income of $200,000 or more per year for the last two years.
- You have a net worth of $1 million or higher.
If you’re accredited, you have opportunities to invest in farmland via crowdfunding platforms. The requirements for crowdfunding platforms are usually pretty high. Investors often invest in private equity or directly into a portion of the land, such as buying an acre of land.
Crowdfunding platforms typically require a minimum investment of $5,000 to $20,000 and an investment duration of five to ten years with little opportunity for a secondary market.
If you aren’t accredited, though, you still have plenty of options. Non-accredited investors are more common, so I’ll focus on those opportunities from here on out.
How does investing in farmland work?
If you’re a non-accredited investor, there are many ways to invest in farmland without investing in the land directly.
This isn’t the least expensive way to invest in farmland, and it may not be a possibility for you, but it’s worth mentioning.
Anyone can invest in farmland directly if they have the cash or can secure the financing. Websites like LandAndFarm work like Zillow for residential properties. You can see which farmland is for sale and make an offer.
When you buy land directly, you have two options to own it:
- Operator landlord - You own the land, grow on it, and rent out part of it.
- Non-operator landlord - You own the land but don’t grow on it. Instead, you rent out the entire farmland.
Invest in debt-based deals
When you invest in a farmer’s debt, you are the “bank.” You lend the money for the farmers to buy the farmland. Think of it as peer-to-peer lending for consumers. You can invest as little as $100 on some platforms. But, the more you invest, the more you’ll earn.
When you invest in debt deals, you have a set interest rate and maturity date. You know how much money you’ll receive (unless the borrower defaults). If they do default, the farmland is the collateral, which would be sold to pay you back the money you’re owed.
Invest in equity-based deals
If you’d rather invest in the equity side, you may earn higher returns but definitely take more risk. As an equity investor, you buy a portion of the land, earning a prorated amount of the returns earned on the land.
Invest in REITs
If you’d rather have a more passive or indirect investment in farmland, invest in farmland real estate investment trusts (REITs). These real estate investment trusts are owned by a fund manager who controls the funds.
The fund manager raises money to buy farmland, divvying up the land into shares that investors can buy or sell on the market.
As a REIT owner, you don’t know which land you own as you put all faith in the fund manager to handle the funds accordingly. Since REITs trade on the stock market, they are more liquid since you can buy or sell them during normal market hours.
What are the returns on farmland investments?
On average, farmland has returns of 12.24% annually. Comparing that to the average stock market return of 9.2%, you may think farmland is the way to go, but you should always diversify your portfolio.
There’s no guarantee you’ll make the same return or even close to it, and a majority of investors never beat the market. Diversifying is the key to ensuring you have a chance at both protecting and increasing your investments.
Pros and cons of investing in farmland
Like any investment, there are pros and cons to investing in farmland. Understanding what could be good and what might go wrong is important.
If you can afford to invest in farmland, I suggest diversifying your portfolio with it. Even if you only buy a couple of REIT shares, you’ll diversify a portion of your income, whether in your taxable portfolio or retirement portfolio.
Any money you can diversify outside of stocks, bonds, or even residential real estate is a great way to potentially increase your earnings and decrease the risk of a total loss.
Yes, non-accredited investors can invest in farmland. Farmland REITs are the best option since they are liquid and have a low barrier to entry. You can invest in farmland REITs with as little as $100 in some cases.
Every investor has a different risk tolerance and ideal returns, but more often than not, farmland has better returns. Historically, farmland has a 12.24% annual return, and the stock market has a 9.2% annual return. This doesn’t mean putting all your money in farmland is the right move, though — diversifying in both markets will yield the best results.
The landscape can change in any given year for both farmland investing and commercial property investments. However, historically, farmland produces 6% higher returns than commercial real estate. In recent years, returns of 6% to 12% have been the norm on commercial real estate.