Whether you wish to participate actively or passively to generate income through farmland investments, you’ll need to learn the ropes of the industry. Go through my comprehensive guide for all the information you need. The idea of making money from farmland might sound challenging at first. But it’s a profitable and easy investment option, thanks to new opportunities and companies like FarmTogether. Let’s get into it.
I know what you’re thinking. Your knowledge about farming and agriculture might be limited, so how would I even know where to get started??
Don’t worry! There are many ways to make money from the industry without being involved directly. I have compiled all the information you need in this detailed guide on how to invest in farmland, so let’s get started.
Table of Contents
What are Farmland Investments?
Before diving into details, here’s an introduction for newbies. As the name suggests, farmland investments are related to agriculture, including crop production and raising livestock.
Although farmland investment is an individual industry on its own, it is also seen as a segment of real estate, and thus acts as a diversification opportunity within the real estate sector. So, if you’re already investing in real estate, investing in farmland funds can help you improve your portfolio.
A common misconception about farmland investing is that you need to know the ropes of the industry. While there are some components of the investment opportunity you should be aware of, you can easily acquire farmland as you would with any other property and earn revenue without being an agricultural expert.
Believe it or not, almost half of the 911 million acres of farmland in the US are actually rental properties. This means investors own the land, and the farmers pay rent to use it for agriculture. These investors are known as non-operating landlords.
The Latest Trends in Farmland Investment
If you’re wondering how to invest in American farmland, this is the right time to make your move. Currently, the US is losing around 500,000 acres of farmland every year. This means by the year 2050, we may lose around 15,000,000 acres of valuable farmland.
Why is that a problem? Well, losing farmland means less food which will eventually lead to scarcity and inflation in prices. By 2050, the global food demand is speculated to rise by 98%.
This means we’ll need to produce twice the amount of food in the coming years to sustain the global community.
As the need for food increases in the US, the country’s demand for and reliance on farmland will increase, making it a profitable investment for the future.
Another important factor in the farmland investment trends is the retirement of farmers. Today, the average age of a US farmer is around 58. What we’re seeing is as these farmers retire from their jobs, they’re passing it on to their next of kin who no longer have the desire to operate the farm; thus, the market will have a surplus of farmland owners looking to sell their property or potential vacancies.
How to Invest in Farmland? A Step-by-Step Guide
If you’re looking at how to invest in farmland without farming or how to invest in farmland royalties, you’re at the right place.
Although farmlands investments are safe and profitable, there’s a few important things you’ll want to know before jumping into the industry. I have compiled the ultimate guide to farmland investment with six well-defined steps.
Using this guide, you can conduct thorough due diligence on your target farmland offering, choose the right opportunities, and mitigate your investment risks. So let’s dive right in.
Step 1 – Prepare Yourself for Long-Term Investment
The first thing you should keep in mind is that these investments work with long-term targets. So, you can’t expect returns on your investment within the first month.
This means you’ll have to prepare yourself to put your investment away for at least a year or two. In fact, the usual turnover time for farmland investments is around 1-7 years before you get your first returns on investment.
In addition, if you plan to invest in farmland, you should diversify your portfolio among different asset classes. Hence, you have multiple income streams to survive while you wait for the returns.
And more, sas commodity prices keep fluctuating, farmland investments can bring good returns over long periods.
The trick to making a smart investment is to prepare for the risk beforehand.
Step 2 – Diversify Your Investment Approach
Diversification is the key to making safe investments and mitigating potential risks. That’s why you should make sure to look into multiple geographical commodities and invest in multiple different crop types.
This geographical diversification, along with the crop insurance hedge, will protect your investment from risks and ensure good returns.
Step 3 – Assess the Soil and Water
Is the soil fertile? Is there sufficient water available for irrigation? You should pay close attention to these factors of the deal to make sure it’s the right property for you.
For example, when you consider a rental property for investment, you usually check the tenants’ facilities, location, living conditions, and other details. All these facts help you see whether the property will bring reliable rental income.
Similarly, when you’re investing in farmland for rental income, assess the soil and water to know whether the farmland is a profitable investment.
…Thankfully, with FarmTogether as mentioned above, this is all taken care off for you.
For reference, soil is classified into three classes, Class 1 being the best quality. The soil quality also depends on the crops that grow on the farmland, as soil requirements vary for every crop.
The water availability is determined by checking whether the farmland has one of three primary water sources.
These include wells, rainwater, and surface water generated from a nearby water body. If your farmland ticks all three boxes, it is an ideal passive income investment.
Step 4 – Target Sustainable Farmlands
Selecting sustainable agricultural land is another important factor. Even if your target farmland has abundant water sources and fertile soil, it should be properly maintained to ensure maximum profit.
That’s why you should always ensure the owners and operators before you carried out healthy and sustainable practices on your chosen farmland. This includes regularly adding nutrients and organic matter to maintain the ideal soil tilth.
Step 5 – Acquire Multiple Properties
You shouldn’t only rely on one farmland property for profit. For passive income, try investing in other properties (as mentioned above in regards to geographic and crop type) as well. Farmlands, as with any other investment, are subject to a range of risks, including droughts, weathering, and pest infestations.
Owning multiple properties and hosting various crops can help you create a hedge against these potential risks and safeguard your investment returns.
Step 6 – Select the Ideal Way for Investing in Farmland
This is perhaps the most crucial aspect for those wondering how to invest in farmland. Once you have all the information, you’ll have to take your first step into the farmland real estate industry.
There are many ways you can acquire farmland for investment and earn passive or active income.
Here’s a list of the ways through which you can invest in the farmland of your choice with the amount you have at hand.
Buy Land and Operate it Yourself
While this isn’t the ideal option if you want to participate actively in the agricultural field, it can still be lucrative. You can grow food and raise livestock by integrating sustainable practices in your farmlands.
The first thing to do is choose the perfect piece of land for farming. You can find cheap lands in rural areas and change them into lucrative farmlands by improving their soil and other conditions.
Just keep in mind that this may increase your initial costs and delay your returns on investment. But on the brighter side, you can follow your passion and earn through it.
Since you have control here, you can promote sustainable agricultural practices and do your part in reversing the effects of climate change.
Acquire Farmland to Earn Rental Income
You don’t want to get involved in farming directly? No issue! Statistics show that more than 39% of all farmlands in the US are rented out to farmers.
As the owner, you’ll have to take up the initial payment responsibility along with the mortgage on the land while the farmer implements his skills.
Besides that, leases on farmlands are typically longer compared to commercial and residential land. This lowers the risk considerably for those purchasing farmland for rental income.
Invest in Farmlands Through Crowdfunding Options
Let’s say you don’t have enough money to purchase farmland. That doesn’t mean you should drop the idea for good. Instead, there are crowdfunding opportunities, such as FarmTogether, and others, that enable you to own just a portion of the farm and at lower minimums (15k).
These organizations gather investments from multiple accredited investors and purchase the properties on their behalf. This way, the investors can own a part of the land which they wouldn’t be able to afford on their own.
Invest in Agricultural Company Stocks
If you’re wondering how to invest in farmland indirectly without purchasing or renting out land, you can do so by buying stocks. If you already own some stock market assets, the agriculture sector will help you diversify your portfolio and bring good returns.
Apart from companies operating agricultural land, other companies produce seeds, farm equipment, fertilizers, and biotechnology. You can easily add agricultural stocks into your portfolio by purchasing assets from such companies that perform well in the market.
Purchase Agricultural ETFs
Through agricultural ETFs, you can invest in crop commodities and earn profitable returns on your investments. While this doesn’t involve directly investing in farmland, it can help you benefit from the agricultural industry’s growth.
Remember, you need a thorough understanding of how the market works if you want to invest directly in crop commodities. However, purchasing ETFs makes it easier for you to reap the benefits without any extensive hassle.
If you’re already investing in stocks and ETFs, you can ask your fund manager to diversify your portfolio through agricultural ETFs and earn sustainable profits from farmland.
Go for Farmland REITs
REITs are companies that finance or own real estate to generate income. There are several agricultural REITs as well that own lucrative farmlands for investment.
The best part about farmland REITs is that you don’t have to purchase the entire property yourself. Similar to crowdfunding options, you can partially own farmland with minimal investment and earn returns.
Besides that, REITs allow you to multiply your income across multiple agricultural assets. So, even if you can afford to acquire agricultural land, it is preferable to invest partially in multiple endeavors through REITs.
This way, you can make sure you don’t put all your eggs in one basket and mitigate your investment risk efficiently.
How Can I Invest in Farmland?
If you’re wondering how to invest in farmland, there are many options you can choose from. It depends on the amount you’re willing to invest, your risk tolerance, and the type of income you want to generate.
For example, if you have ample funds, you can acquire farmland and actively operate it yourself for income. On the other hand, if you want a passive income source with minimal investment, you can go for crowdfunding options and farmland REITs.
How Much is an Acre of Farmland Worth?
Farmland values vary according to the demographic location, soil fertility, and water availability. However, the USDA suggests that typical farmland can cost anywhere from $3000-$6000 per acre.
Is Farmland a Good Investment?
Farmland is undoubtedly a good investment because of its various benefits. These include high returns on investment, diversification, hedge against inflation, tax benefits, and risk-mitigating factors, and a positive environmental impact when done through sustainably focused companies.
That concludes my guide for how to invest in farmland. While farmland investments carry some risks, such as weather and pest-related problems, it’s still beneficial in the long run.
As compared to other passive income investment streams, farmland investments provide high returns on investment and have multiple diversification opportunities.
In a nutshell, to participate in farmland investments, you should prepare yourself for a long-term investment, choose your mode of investment, assess the property at hand, and diversify your portfolio.
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