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 simple, many 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 key considerations to look at before investing in farmland.
Finding a Professional to Advise your Investment
Many investors, both large and small, make the mistake of not employing an agent that has the necessary knowledge of both the industry and the local market who can care for their money. Many times, throughout my real estate career, investment experience, and as a farmer myself, I have seen investors use an agent who does not have the required land expertise for their transaction. When looking to diversify with farmland, seek a real estate professional with historical, proven competence in the area.
Typically, land professionals are a member of organizations like the Realtors® Land Institute (RLI) where land is the single most dealt in real estate asset class. To go further, those who hold RLI’s elite Accredited Land Consultant (ALC) Designation are certified to be trained and accomplished in the land industry, of which only about 500 agents have acquired worldwide. I often use the quote “I will not go to a heart doctor to get my hip replaced” to demonstrate the importance of using an agent that specializes in land. A Realtor® who sells homes in an urban area typically would not have the specific expertise to know the farm and ranch industry and understand the investment quality of such a property; just as a farm and ranch real estate agent would likely not know about condominium prices in a downtown area. Use RLI’s Find A Land Consultant search tool on www.rliland.com to look for an ALC Designated agent near you to make sure you are using a qualified land professional.
Benefits of Investing in Farmland
When you invest in farmland, one of the best benefits known to investors is the ability to have the land as a tangible asset. 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, etc. An owner can depreciate some of these assets each year to offset yearly taxes. Always ask your favorite CPA for more information.
Not all international investments are bad, they just can be more volatile than what is typically found in the U.S.
Another great benefit to owning farmland is the ability to lease, farm, or share-crop your property to make money. With a growing population, 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; for example, railroads, rivers and highways. Other countries have very fertile soil but have no roads to deliver products to a port which makes for a hard harvest. Also, some foreign countries have great land to grow crops on 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 what is typically found in the U.S.
Selecting Farmland Investments
When selecting a farm to purchase, an investor needs to keep these three considerations 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, or how much can you spend, is key when purchasing farmland. Some investors move capital into property with no debt while many move some capital and acquire debt through lenders. Lenders are everywhere and, in my opinion, investors should choose a lender that understands farmland and its specific characteristics. There are options for government loans through the USDA and other government entities as well. Consult your land professional for direction on lenders who 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 even hold land for as long as 10 or more years to see the returns. The farm economy goes in cycles, much like the overall economy, so it will fluctuate up and down. To see real potential in farmland, one must be ready to hold on through at least five years or more.
Emotion is always on the table when it comes to tracts of land. Throughout my career, I have fallen victim to getting emotional toward pieces of property. This is a definite thing to remember when it comes to you and your family’s financial future—leave your 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.
Divesting a Farmland Investment
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 of using a qualified professional. Visit the Realtors® Land Institute website to find a qualified agent when it comes time to sell your investment. The right professional can elevate your sales price, alleviate hassle, and give you confidence through 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 who 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 is to remember to surround yourself with qualified people to help you make your decisions along the way. 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 serves on their Future Leaders Committee. He resides in Paris, Texas, with his wife, Kristy, and daughter, Caroline. Find out more at C21PHP.com.