OVERVIEW: INVEST IN FARMLAND
From the beginning of time, farmers have been an integral part of feeding the public. Many technological changes have impacted the farming industry, from the invention of the plow to more modern advances, such as GPS technology, irrigation, and drought-tolerant seed varieties. Many facets have changed but one has not, the dirt. Investing in land is a "simple" process of purchasing property and creating value through: revenue, appreciation, or tax benefits. Although it sounds that many "simple" investors don’t understand the difficulty in selecting properties that make sense for their investment goals when they invest in farmland, for example investing in farmland for retirement. Listed below are a few short items to look at before investing in farmland.
FIND A PROFESSIONAL
Many investors both large and small make the mistake of not employing a professional that has the knowledge of the industry/market and can care for their money. Many times, throughout my real estate career, investment experience and as a farmer myself, I have seen investors not use the correct professional with knowledge of the land. When looking to diversify with farmland, seek a real estate professional with historical and proven confidence in the area.
Typically, land professionals are part of organizations like The Realtors® Land Institute where land is the single most asset class, they deal in. To go further, Accredited Land Consultants are trained and accomplished in the industry, of which only a few hundred agents have acquired the designation worldwide. I use the quote, “I will not go to a heart doctor to get my hip replaced.” A Realtor® who sells homes in an urban area would not have the specific expertise to know the farm and ranch industry and understand the investment quality of a property. A farm and ranch real estate agent would not know about condominium prices in downtown. Use the Find A Land Consultant tool and look for an ALC Designated agent (see why) to make sure you are using a qualified land professional.
One of the best benefits known to investors is the ability to have land as a tangible asset when you invest in farmland. This is especially important when a portfolio is heavily invested in the stock market. Another benefit we see in farmland is the tax deduction in relation to depreciation. Many farms contain improvements that depreciate such as grain storage, irrigation pivots, shops, barns and etc. An owner can depreciate some of these assets each year to offset yearly taxes. Always ask your favorite CPA for more information.
"The United States has some of the best potential farmland for investment..."
Another great benefit to owning farmland is the ability to lease, farm, or share crop your property, to make money. The value of farmland has increased over the last several years due to an increase in demand for food and fiber globally. The United States has some of the best potential farmland for investment because of our democratic government and the infrastructure it possesses; ie, railroads, rivers and highways. Other countries have very fertile soil but have no roads to deliver products to a port, and it makes for a hard harvest. Also, some foreign countries have great land to grow crops but have a corrupt government and/or the state owns all the ports of exchange. Not all international investments are bad, they just can be more volatile than the U.S.
When selecting a farm to purchase an investor needs to keep three simple points in their process. Do I have the capital to make the investment? Do I feel comfortable in a long-term project? Can I leave emotions aside when purchasing/selling?
- Knowing your buying potential, aka how much can you spend, is key when purchasing farmland. Some investors move capital into property with no debt and many move some capital and acquire debt through lenders. Lenders are everywhere and, in my opinion, choose a lender that understands farmland and its characteristics. There are options for government loans through the USDA and other government entities as well. Consult your land professional to direct you to lenders that can help.
- Farmland investing for the most part is a long-term project. Many investors buy land and hold it for extended periods of time to get the most return. Many large investors may hold land for as long as 10+ years to see the returns. The farm economy goes in cycles much like the economy, which as a whole goes up and down. To see real potential in farmland, one must be ready to hold on through at least 5+ years.
- Emotion is always on the table when it comes to tracts of land. Throughout my career I have fallen victim to getting emotional towards a piece of property. This is a definite thing to remember when it comes to you and your family’s financial future. Leave emotions at the door. The phrase, “time is money”, can go both ways. Waiting two years to purchase because it makes more sense financially or selling now because you have a willing buyer, may factor into your decision. Remember, “A Bird in the Hand is Worth Two in the Bush”.
"To see real potential in farmland, one must be ready to hold on through at least 5+ years."
After the asset has reached potential or maybe you are ready to buy a new investment, it is time to liquidate. When you invest in farmland, selling the property is as important as the day you purchase. I cannot express the importance using a qualified professional. Visit the Realtors® Land Institute to find a qualified agent when it comes time to sell your investment. The right professional can elevate your sales price, alleviate hassle, and supply you with confidence to the day of closing. When selling farmland, a land professional must qualify buyers and must advertise to the masses. This requires a tailored marketing program and someone with whom has the skill set to vet buyers and make sure qualified candidates can meet or exceed the requirements to get to the closing table.
Investing in farmland is very rewarding, if done correctly. The key to remember is to surround yourself with qualified people to help you make decisions. This is your money and your future, happy hunting!
About The Author: Clayton Pilgrim, ALC, is a licensed real estate agent with Century 21 Harvey Properties in Paris, Texas. Throughout his career he has been in production agriculture from on the ground operations to large scale management. Pilgrim is involved in private investing in farms, ranches, and recreational tracts throughout East Texas and Southern Oklahoma. He is a member of the Realtors® Land Institute, an Accredited Land Consultant and on the board of the Future Leaders Committee. He resides in Paris, Texas, with his wife, Kristy, and daughter, Caroline.