Investing in farmland is a topic that’s been gaining more and more attention in the past few years. People are looking for stable alternatives to traditional investment options in an uncertain economy. Farmland is seen as an attractive option, particularly as the world’s population continues to grow and the need for food and resources increases.
But is investing in farmland a good idea? Farmland can be a good investment because it offers short-term and long-term alternatives to create wealth. Also, investing in farmland protects against inflation and is a hard asset that maintains its value in your investment portfolio. From 1992 to 2020, farmland produced a positive yearly return, generating an average annual return of 11.5% (Source: Forbes)
Read on to explore the reasons why investing in farmland can be an excellent idea, including both the pros and cons of investing in farmland. Also, I wrote a whole article if you wonder whether self-storage is a good business.
Reasons Why Investing in Farmland Can Be a Good Idea
While most investors consider residential and commercial real estate options, farmland investment offers a unique, untapped opportunity that shouldn’t be ignored.
Here are reasons why you should consider investing in farmland.
1- Farmland is a Stable Investment
Farmland investment is a reliable and stable investment option because of the growing global population, increasing demand for food, and the scarcity of arable land. In addition, investing in farmland is a long-term investment that can provide a consistent return on investment (ROI) due to its unique characteristics.
Unlike other real estate investment options, farmland has a steady and non-cyclical market since people need to eat regardless of the economy.
2- Farmland Investment is Inflation-Proof and Tax-Efficient
Investing in farmland can hedge against the impact of inflation and tax liability on other investments in your portfolio. Farmland investment is a real asset that performs well in inflationary conditions and delivers stable returns over long holding periods (Source: Dow Jones & Company)
Plus, the value of farmland investment tends to rise with inflation, allowing investors to maintain their purchasing power.
Moreover, investments in farmland are tax-efficient due to favorable tax policies and deductions on farmland investments, providing a shield against rising tax rates on personal income. The good news is that all 50 US states give preferential property tax rates to agricultural land to help farmers and fight urban sprawl (Source: Forbes)
3- Diversification of Your Portfolio
Farmland investment is an ideal way to diversify your portfolio because it is uncorrelated, meaning that its performance isn’t tied to the stock market.
When the financial markets experience a downturn, investing in farmland can serve as a buffer against periods of economic volatility. The benefits of diversification can’t be overstated because having a mix of investments can help minimize risk and maximize returns.
4- High Return on Investment
Farmland investment yields high returns on investment because of its long-term nature and increasing demand for food.
The growth of the global population and the need for more farmland to produce food has made farmland investment an attractive option for investors looking for high-yield investments. In many cases, investing in farmland tends to generate an ROI of between 9-12%.
Over the last two decades, the average return on United States farmland was 12.24%, according to AcreTrader. For example, if you invested $10,000 in farmland in 2000, your farmland investment would now be worth over $96,149.
5- Environmental And Social Benefits
Investing in farmland offers environmental and social benefits that make it unique from other real estate options (Source: The Balance)
Farmland investment presents an opportunity for investors to raise the quality and quantity of food produced. More importantly, funding for farmland investment provides a way to support small-scale farmers and help produce healthier food more sustainably.
Pros and Cons of Investing in Farmland
Investing in farmland offers an excellent opportunity if you are looking for ways to diversify your portfolio and generate higher returns while supporting sustainable agriculture practices. With the increasing global population, investing in farmland can be a smart long-term investment for anyone looking for security, stability, and the potential for high-growth returns.
Here are the pros and cons of investing in farmland:
Pros of Investing in Farmland
- Steady income: Agriculture is a stable industry. With a growing population and an increasing demand for food, investing in farmland can provide a consistent source of income through the sale of crops or by leasing land to farmers. Moreover, as global population growth continues to accelerate, the demand for farmland is likely to increase further.
- Hedge against inflation: Farmland can be considered an inflation hedge because its value tends to increase with inflation. Farmland, in this sense, is a tangible asset, and its value rises along with the prices of commodities. Inflation can reduce the purchasing power of your money, but investing in farmland can provide a reliable way to protect the value of your money.
- Tax Benefits: There are a host of tax benefits associated with owning farmland. For example, expenses for maintaining and operating a farm can be claimed as deductions on your income tax. Additionally, farmland may qualify for different types of federal, state, and local tax credits, savings, and exemptions. I encourage you to check out the United States Department of Agriculture‘s website to learn more about the Taxes and USDA Programs.
Cons of Investing in Farmland
- Investing in farmland requires significant capital: Investing in farmland requires a substantial amount of capital upfront. The cost of buying land could be considerably high. So, if you don’t have the money to purchase farmland outright, you’ll need to find alternative sources of financing, such as applying for a loan.
- Business risk: Farming is dependent on numerous factors that affect the productivity of crops, such as climate change, pests, diseases, and natural disasters. If any of these factors happen, it can lead to lower yields or complete crop failure, which could lead to significant losses. Managing a farm or hiring professional farmers is also a long-term commitment.
- Illiquid asset: Unlike buying stocks, investing in farmland is not a highly liquid asset. Immediate income from farmland ownership is limited, and growth in the value of the property would be an expectation over a long time frame. Also, transferring ownership of farmland may take a while because land values or markets may fluctuate.
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Final Thoughts
Investing in farmland can be a great way to diversify your portfolio and gain returns through stable cash flows and long-run asset value appreciation.
However, remember that investing in farmland does come with several risks and challenges, which you can mitigate through sound due diligence, proper management, and well-planned strategies.
If you decide to invest in farmland, I encourage you to check out this article from Bankrate to learn more about how to invest in farmland to minimize these risks.