How can I invest in farmland?
While the roots of tenant farming in America date to around the end of the Civil War, the farming sector remains a nontraditional asset category for real estate investors. That's largely because farmers, both operators and retirees, own the majority of the country's cropland and pastureland.
However, farmland has been growing as an asset class for investors in recent years as new ways to invest in the sector have emerged. Here's a look at how an investor can add some farmland to their portfolio.
Buy land directly
The most obvious way to invest in farmland is to directly purchase usable cropland or pastureland and rent it out to a farmer or rancher. This method of investing in farming has a sizable upfront cost since an investor would likely need to purchase a large plot of land. Average land prices for cropland were $4,130 an acre in 2018, while pastures cost about $1,390 an acre, according to the USDA. Meanwhile, investors typically rented out cropland for $138 an acre and pastureland for $12.50 per acre, implying cash yields of 3.3% and 0.9%, respectively.
Investors that buy land as a means to invest in farming have several options, each of which has its share of pros and cons:
- Purchasing an existing farm via a sale-leaseback transaction, where the current farmer continues to work the farm and pay rent to the new owner. A sale-leaseback transaction would likely be the least risky and most passive way of directly investing in farmland. However, in exchange, an investor might need to pay a higher price for the land and therefore earn a lower cash yield.
- Buying an existing farm or agricultural land and leasing it to a new tenant. This option could potentially generate a higher return for an investor. However, it would likely require more work upfront to find the right tenant for the farm.
- Acquiring land that's not currently used for agriculture and converting it to cropland, pastureland, or an urban farm. A farmland conversion has the potential to produce the highest return since an investor would likely be able to purchase land for a lower price and, therefore, could earn a higher cash yield and potentially benefit from higher land value appreciation. However, this option requires the most work since an investor would need to transform the land to farm use and find the right crops and tenants for the location.
Purchase shares of specialty REITs focused on farmland
Two publicly traded real estate investment trusts (REITs) currently focus on acquiring farmland and leasing it to farmers:
- Farmland Partners (NYSE: FPI).
- Gladstone Land Corporation (NASDAQ: LAND).
Farmland Partners is the largest of the U.S. publicly traded farmland REITs. As of the middle of 2019, it had roughly $1.1 billion of assets, including 158,000 acres of farmland in 17 states. It leased this land to more than 100 tenants that grow 26 varieties of crops, 57% of which are row crops (corn, soybeans, rice, and cotton) and 42% of which are permanent and specialty crops (almonds, avocados, wine grapes, non-tree fruit, and vegetables).
Gladstone Land, meanwhile, owned 111 farms with 86,534 total acres in 10 states valued at $876 million. It mainly focuses on farmland used to grow healthy foods such as fruits, vegetables, and nuts.
Any investor with a brokerage account and enough money to buy one share can invest in these farmland REITs, making them the most accessible and lowest-cost way to invest in farmland. However, because they trade on stock exchanges, they do have some market risk.
Another REIT option is Iroquois Valley Farmland REIT, which is a public non-traded REIT, meaning it's open to all investors but doesn't trade on a stock exchange. The company focuses on owning a portfolio of organic farmland. However, it has a high minimum investment of more than $10,000, and investors can't redeem their shares for five years.