Despite concerns in other areas of the economy surrounding the COVID-19 outbreak, now is still a good time to invest in farmland because the market is neither too saturated or thin. In fact, many investors are moving to investing in farmland as a safe haven. Plus, farmland has consistently yielded returns greater than 10% over the last five decades - so it is a proven good long-term investment.
If you’re interested in investing in farmland, you will need to learn the basics first though so you can make smart choices.
Top Reasons to Invest in Farmland
Investors point to a lot of different reasons when they explain why they choose to put money in farmland real estate. Some of the most popular reasons include:
- The option to hold onto land until it becomes profitable to sell.
- Transitioning the land to suit an emerging, high-profit market like organic produce or hemp.
- Making money by leasing it to farmers.
- Adding diversity to investment portfolios.
- Scarcity. They aren't making any more of it.
With the right approaches, farmland investing can give you an exceptional, one-time profit or provide a long-term source of income. Either way, it’s a relatively stable option that fits well into most portfolios.
What to Consider Before Investing Farmland Real Estate
Like any investment, buying farmland real estate comes with some risk. That means you should do some research and hire an expert land agent in your area before you invest in farmland. Learn about the following factors to make sure you choose land that’s likely to increase in value.
The Land’s Previous Uses
A piece of land’s previous uses can play a crucial role in your investment. If a former owner used chemical fertilizers, you might find it challenging to qualify for organic farming. If the land has sat unused for a decade, you may need to add a lot of nutrients to the farmland soil before you can grow crops.
The Soil’s Acidity and Nutrients
Crops only thrive when they’re grown in the soil with the right acidity and nutrients. Before you invest in farmland, get a soil test that measures the acidity and amounts of nutrients like:
- Aluminum
- Calcium
- Lead
- Magnesium
- Phosphorus
- Potassium
- Sulfur
Without the right levels, you will either need to grow different crops or amend the soil before planting.
The Farmland’s Soil Drainage
Most crops grow best in soil that drains quickly. For most plants, you don’t want standing water that contributes to rot, blight, and mold.
You can test soil’s drainage by digging a shallow hole, filling it with water, and returning the next day. If the hole still has water in it, then you probably don’t want to invest in the land.
Surface and Mineral Rights
Buying farmland always gives you rights to the land’s surface. You may not, however, have mineral rights. If a previous owner sold the land’s mineral rights, then the mineral rights are not included in your investment.
Owning mineral rights doesn’t matter for some land. If the company that owns the mineral rights decides to extract oil, natural gas, coal, or other commodities from the property, though, the excavation process will disrupt farming and can even limit the amount of land available to farm.
Determine How Your Investment Will Affect Your Taxes
Investing in farmland could increase your tax burden. In most cases, you will need to pay property taxes. You may also need to pay state and federal taxes on income that you earn from the land.
Ways to Get Started in Farmland Investing
If you have a large amount of money, then you can start investing in farmland almost immediately. You just need a qualified land agent to help you find farmland real estate that will earn money.
Most people, however, don’t have thousands of dollars to buy acres of land. That doesn’t mean you cannot benefit from investing in farmland real estate, but you may need to take some additional steps.
Know How Much You Can Spend
You need to determine how much money you can afford to spend on farmland. Even if you need to borrow money, a sizable down payment should increase your profit potential.
Find a Funding Source
Traditional lenders often charge high interest rates that make it difficult for farmland to earn profits. If you get a low interest rate, then a conventional loan might work well for you. Keep in mind that you have alternatives, though.
Crowdfunding gives you a low-cost way to access the funds you need to purchase farmland real estate.
You could also co-invest in land with friends, family members, or business partners.
Use a Qualified Land Agent Before You Invest in Farmland
Make sure you use a qualified land agent when investing in farmland. Land transactions require specialized expertise. One mistake could make it difficult or impossible for you to get a healthy return on your investment.
Find a land consultant in your area and make sure the agent has experience in farmland transactions. Accredited Land Consultants, agents who have earned the ALC Designation, are know in the industry as the most experienced and educated agent in the industry for assisting with land transactions.
There are plenty of good reasons to invest in farmland, but you may need help from a land agent, lawyer, and CPA to make sure you choose a piece of land that will give you a strong return for your money.