Agricultural land is a niche but in-demand sector of commercial real estate. All those corn fields and apple orchards? Yes; believe it or not, empty, cultivated acreage can be a real asset. The most common way that CRE investors venture into farmland is to buy a property, or even just part of one, and rent it out to a tenant farmer. This may be a farmer who begins cultivating the land, or this may be an existing industrial or multi-family farm.
Of the over 900 million acres of farmland in the US today, nearly one-third of that land is owned by investor groups. The value of arable land rose at least 6% in 2020 alone, and as untouched acreage becomes scarcer, the value of farmland will just continue to rise.
Increased Demands for Food means Increased Demand for Arable Land
Farmland is not a CRE fad. In fact, it’s the opposite. Agriculture has always been an essential part of the country’s productivity and trade economy. It’s necessary for food production, products for livestock husbandry, raw materials for fabric manufacturing and alcohol production, and many more things we rely on every day.
As the population grows, the demand for arable land increases. And population growth doesn’t seem to be slowing any time soon. With limited unused, uncultivated viable acreage on the market, this alone means the value of farmland, especially that which is already developed into a functioning production operation, will continue to increase.
Our society relies on the agricultural business to function. And we’re not just talking the traditional staples like cash crops and livestock anymore. With the advent of agroforestry, indoor vertical farming, industrial hydroponics, greenhouses, and other new strategies and tech in the agricultural industry, farming is anything but a traditional and fading economic sector. In fact, it’s the polar opposite.
Agricultural Ventures are Secretly Super Profitable
There are myriad reasons why purchasing an agricultural business is one of the safest bets to make in CRE, profits-wise. Whether you are purchasing a plot of that ever-dwindling empty acreage supply, or you’re investing in an existing farm, you’ll see the same benefits over the long-term.
However, something to consider before you invest is that a start-up project on empty land, naturally, will take longer to yield returns. Conversely, investing in an existing agricultural business can reap dividends almost immediately. Some of the characteristics of farmland that make it such a stable and valuable addition to any CRE portfolio include:
The Agricultural Sector is Inflation-Proof
Perhaps the timeliest of these, considering what happened with inflation just recently in 2022, your investment in a crop or livestock business actually benefits from inflation. Rent prices and crop prices rise with inflation, even if the business’ profits do not.
The rise in product value means your tenant farmers are able to absorb the increased cost of raw materials and other overhead costs like machinery upkeep. In turn, productivity remains steady, and on the outside end, you’ll see a return that outdoes any other CRE investments you have, which are all much more susceptible to inflation than is agricultural land.
Farming Consistently Out-Performs on the Consumer Price Index
Investment groups began flooding the agricultural sector in the 80s. Family farms were having a hard time in the 80s and 90s, which made them susceptible to seeking outside funding. Also, Warren Buffet made it cool. Hey – at least this bandwagon was a smart one to jump on.
According to the National Council of Real Estate Investment Fiduciaries, over the last two decades, commercial real estate has generated annual returns that average 9.5%, whereas farmland has consistently generated an average of 12%. Even when you consider for inflation, agricultural properties still outperform every sector of CRE by 7%.
Agricultural Land is a Low-Maintenance Source of Passive Income
Everyone loves a low-maintenance investment that improves their portfolio while requiring very little attention. Some investors refer to it as a “set it and forget it” investment. Simply, you’re not the farmer(s). It’s not you who has to deal with maintenance, improvements, cultivation, harvesting, etc. You’re investment spurs all those things passively, and then you later reap the rewards. It’s zero work with guaranteed returns, and what’s better for an investment portfolio than that?
Investments in Farmland Guarantee Stable, Long-Term Returns
The population is growing. Available land is decreasing. Yield needs are increasing, and aren’t going to stop. Globally, to meet food demands, it’s expected that farmers will have to increase yields by 70% in the next 30 years. In tandem, the value of arable land rose 8% in 2021 alone.
Market volatility affects every sector, but farmland still wins out as the sector of commercial real estate most insulated from market fluctuations. Standard dividend deviations for other CRE properties sits at about 8%, where farmland is a little less than 7%. That may not sound like a big difference, but when you consider the fact that the agricultural sector only had one fiscal quarter in the red between 2000 and 2018, which was literally just -0.01% in 2002, we’re talking about a virtually uncrushable investment sector.
Agricultural investments Let You Triple-Dip Returns
Farmland is by no means the only type of commercial property investment that provides multiple avenues of returns, but it sure doesn’t hurt. Consider buying all or part of an industrial farming business. You’re looking at returns from 3 sources:
- Capital appreciation
- Crop yield profits
- Rental income
And when you consider that, historically, farming has been well-insulated from inflation and market volatility, you’ve achieved 3 streams of passive income from investing in just 1 commercial property.
It’s the Only CRE Sector with Crowd Funding as a Significant Source
The agricultural industry has reshaped commercial real estate investing into a more democratic, accessible type of investment. In fact, there are several crowd funding conglomerates that own farming businesses, who require as little as a $3000 to $8000 investment.
There are certainly positive socioeconomic implications to this unique aspect of the crop and livestock sector; it’s no longer only the wealthy who have access to investment opportunities that reap long-term, stable, significant returns. There’s an ESG factor that goes along with this; more and more, people are looking for ways to invest their money that is positive for the US, for families, and for the health of the planet.
Don’t Overlook the Value of a Diverse Portfolio
Any financial advisor will tell you that a diverse portfolio is the way to go, and the stable nature of farmland is a good addition to any portfolio. The theory behind diversifying your portfolio is to protect yourself from market volatility. Consider this:
- My investment portfolio is 80% office and retail buildings, and 20% hospitality. COVID decimated the office and retail market space, but boosted the hospitality industry I am now left with serious, long-term, possibly irreparable damage to 80% my investments.
- My portfolio is 20% office spaces, 20% hospitality, 20% residential developments, 20% warehouses, and 20% farmland. When COVID hit, it devastated my 20% office spaces, which will likely be lasting and never fully recover. It also hurt my 20% warehouses, but that was very short term and has already recovered. While this was happening, the remaining 60% of my investments rose despite the COVID crash.
A very topical analogy, agriculture works the same way. As a farmer, if I mono crop, when the climate changes and the soils are stripped of their nutrients, there is nothing left for me to do but leave the fields fallow until they recover, if they recover at all. I am likely no longer going to be able to support the farm.
However, if I have split my farmland into several plots where I rotate crops and leave parts fallow for soil nutrient recovery, when the climate changes or the soils are stripped of their nutrients, I simply switch cultivating plots. I also have the time to find a new crop that works with these new conditions, while still generating income from the ones the crops that were not affected.
Risks Involved in Agricultural Land
While the advantages of buying farmland abound, there are risks associated with all types of investments. Possible pitfalls to investing in agricultural land include:
Your Investment Relies on a Single Tenant
Many types of CRE rely on several tenants. Think strip malls, office buildings, medical centers, etc. However, with a farm, you’re relying on just one tenant: the business. Were something adverse to happen like the business goes bankrupt, investors are left with a non-functioning farm that will continue to lose money until you find a new tenant.
But the loss doesn’t stop there. If it took you a couple years to find a new tenant, and they want to farm something new, depending on the plant, it can take up to 10 years to become profitable again.
What Happens to Your Profits when Interests Rates Rise?
Just as inflation has been unreasonably high as well as highly volatile, so, too, have interest rates on loans. With any investment, when your ongoing costs increase, naturally, your profit decreases.
Farmland is Susceptible to Environmental Changes
Through much of this article, you’ve likely been thinking, Wait; what about climate change? What about extreme weather? The environment is one of the top two uncontrollable threats to your investment in farmland. Whether the problems are caused by man or you’re just at the whim of the weather, everything above and underground your farmland can threaten crop yield:
- Ground water debt leaves soils dry and weak, and make it impossible to keep proper irrigation infrastructure.
- Widespread warming is causing staple crops in certain regions to no longer be viable.
- Extreme weather events like wildfires or deep freezes in the middle of the season can wipe out entire crop supplies.
- Extreme seasonal conditions like consistent heavy rains or long droughts can suffocate or starve crops and ruin harvests.
Invasive Species can Annihilate Crop and Livestock Yields
Likewise, invasive species of flora and fauna are always sneaking around. Until they’re not so sneaky anymore. Invasive plants mixing with your crops can steal all the nutrients and make the crop small and sickly. Invasive pests can blight the crop and destroy the harvest. Additionally, blights, famine, and illness can wipe out a farmer’s livestock supply.
Why is Farmland Different than Investing in Other Commercial Properties?
Why are there such advantages to this often-overlooked sector of CRE? Namely, crowdfunding and essentiality. To invest in an office building, you’d need the capital to outright purchase it, then you’d have to locate a tenant, and it would take some time for you to see returns on that investment. In contrast, with the crowdfunding movement that has helped boost the growth of an already-growing sector of commercial real estate, farmland proves an ideal way for investors to take a low-capital risk and almost immediately see returns.
Coupled with the economic stability that comes with investing in something as essential to society as agricultural land, purchasing farmland, especially for the purpose of then renting it to a tenant farmer, is an insulated investment, especially in these tricky times of inflation and the economic volatility brought on by the continuing COVID pandemic.
It is important to remember to find the right brokers, though. Respected firms who retain people with long-term experience in land syndication can tell you all the nitty-gritty details you need to know about where and what you are purchasing. Not all farmland works the same way. For instance, historically, permanent crops like orchards have done better than row crops like soybeans.
See? Empty acreage is anything but empty. Full of resources and potential, purchasing arable land has favorable implications for steady, long term returns