How To Invest in Farmland Real Estate

What To Know About Adding It to Your Portfolio

Truck on a farmland road at sunset with barn silo to the left
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Grant Faint / Getty Images

Have you considered adding farmland to your investment portfolio? While it might not seem like an obvious choice, investing in farmland can provide diversification and stability in your portfolio and may provide surprisingly positive returns. In fact, Microsoft co-founder Bill Gates has added hundreds of thousands of acres to his investment portfolio in recent years.

This guide will discuss some of the benefits of investing in farmland, as well as some of the risks. You’ll also learn a few ways you can invest in farmland. Whether you’re looking for an active investment or something more hands-off, farmland investing might be an option for you.

Why Invest in Farmland?

There are plenty of reasons someone might want to add farmland to their investment portfolio. First, investing in farmland is a way to provide diversification to your investments, which is a cornerstone of portfolio management and can help reduce your risks.

Farmland investing can also be a way to hedge against loss during market downturns. The stock market goes through natural cycles, and it’s inevitable it will experience downtimes. But data has shown there’s little to no correlation between the returns of farmland and the rest of the market. In other words, when the stock market is down, it’s possible your farmland investments will continue to generate returns.

Additionally, farmland investing provides surprisingly consistent returns. Over the period from 1970 to 2015, farmland appreciated at an average rate of more than 5% per year. According to Vanguard data, those returns are comparable with the long-term returns on fixed-income securities overall. That doesn’t even take into account the potential returns from the income generated on the land.

Investing in farmland is a way to support an industry that’s at the very heart of the economy and society. Data shows that food demand will increase exponentially in future years, increasing the need for these critical investments.

“Besides being a great tool for portfolio diversification, investing in farming offers a way for investors to improve the food system and the lives of farmers,” said Chris Rawley, CEO of online agriculture investing platform Harvest Returns.

While there are clear advantages to farmland investing, it’s also important to acknowledge the downsides.

First, an important consideration with any investment is its liquidity, or how easily it can be converted to cash without losing value or requiring significant fees. Real estate is generally considered an illiquid asset. When you own real estate, including farmland real estate, you have a significant amount of money tied up. Selling it can be a time-consuming process that often requires hiring a real estate agent, looking for buyers, waiting for a buyer to line up financing, and paying a commission to the real estate agents.

Another downside to farmland investing is that your returns may be dependent on the performance of the crops grown on the land.

“Farmland investing involves risks specific to agriculture, such as crop damage from disease and extreme weather,” Rawley told The Balance by email. “These investments can also be adversely impacted by swings in commodity prices. Investors can mitigate these risks by looking for experienced operators whose farms use innovative growing methods.”

Trends in Farmland Investing

As farmland investing becomes increasingly popular, new trends continue to emerge. According to the Harvest Returns website, more individuals are taking an interest in farmland investing. While it previously was mostly larger institutional investors that bought farmland, individuals are becoming more active participants in the farmland real estate market.

Another trend is that more investors are turning to hands-off investments that allow them to buy farmland real estate without actively managing it. In some cases, it’s investors buying farmland and contracting with someone else to farm it. In other cases, investors make hands-off indirect investments that allow them to invest in and make money from the farmland without being an active part of the business at all.

“Active investors can buy and operate a farm outright, while passive investors might want to consider private placements via an investment platform or purchasing agriculture-related stocks,” Rawley said.

Farmland and other parts of the agriculture sector present a unique opportunity for investors passionate about socially responsible investing. As the dangers of climate change become more apparent, many farms have moved toward running more sustainable and environmentally friendly businesses. As this trend continues, environmental, social, and governance (ESG)-focused investors increasingly are entering a sector that once didn’t align with their values.

Top Ways To Start Investing in Farmland

If you’re considering adding farmland to your investment portfolio, there are plenty of ways to get started. Below are some of the most popular avenues through which to invest in farmland real estate.

Buy Land Directly

Buying land directly might be the most straightforward way to invest in farmland. But while it might be the most straightforward, it’s also the most difficult way to get started.

First, buying farmland directly is expensive. According to the U.S. Department of Agriculture, the average cost of farm real estate in 2020 was $3,160 per acre. For cropland specifically, the average price was $4,100 per acre. As a result, a plot of farmland can easily cost more than $1 million.

Another downside of buying farmland directly is that it’s the least liquid way to invest. While farmland securities can be traded in a fairly simple manner, selling a piece of real estate is a much more complex transaction.

Buying farmland directly also requires a bit of expertise because you have to know what to do with the farmland after you buy it. Often, you can connect with a farmer who will lease the property. You can hire a broker to handle this for you.

“With farmland, if you have some connection, it’s easy to find someone to find a farmer to lease that property from you and get your few-percent return,” Robert Sorrell, a sales agent with Tutt Land Co. and a real estate investor, told The Balance by phone.

Another option is to flip the property, although this requires more expertise on the part of the investor and comes with greater risk.

“My advice would be to try to figure out your goals,” Sorrell said. “Are you looking to have a safe, small return on a property that’s appreciating through the years? Or are you wanting to get a little riskier and try to flip a property?”

Invest in REITs

A real estate investment trust (REIT) is a company that owns and operates real estate. REITs allow individual investors to become partial owners in a piece of real estate by buying shares in the REIT itself. REITs present an indirect way for investors to participate in the real estate market because they aren’t purchasing the properties themselves or doing the hands-on management.

Just as you can invest in other types of real estate with REITs, you can invest in farmland. Farmland REITs, sometimes called “F-REITs,” became popular after the financial crisis of 2008, when investors were seeking out a safer alternative investment.

REITs can be beneficial both for investors and companies. First, a REIT allows farming corporations to raise capital. These securities also let investors add another asset class to their portfolios by directly investing in real estate, which can be expensive to do otherwise.

And because the underlying asset of these farm REITs is farmland, they come with many of the same benefits you’d expect of farmland itself. Beyond that, REITs provide a source of regular income for the investor in the form of regular dividends.

But there are also some risks to REITs. When you purchase shares in one, you’re trusting another company to manage your investment well. As a passive investor, you have no say in how the farmland is managed.

Try Crowdfunding Options

Crowdfunding is a way for many individuals to come together to fund a single goal, usually under the organization of an intermediary such as a crowdfunding platform. Many know crowdfunding primarily as a way for families to solicit donations for individuals, but it’s often used as a way to gather small investors to fund a project.

Just as many crowdfunding platforms have been created to find residential and commercial real estate projects, others exist primarily to fund farmland investing.

Crowdfunding platforms such as AcreTrader, Farm Together, and FarmFundr allow investors to buy shares in an entity that owns a farm. It’s another way of indirectly investing in farmland without any of the hands-on responsibility.

Crowdfunding can be an excellent way for investors to get into real estate without the significant upfront cost that’s often involved. Many investors can’t afford to purchase farmland on their own. Crowdfunding allows them to buy just a small piece of it.

As with any investment, crowdfunding has its risks. Crowdfunding projects are often speculative, meaning there’s little guarantee you’ll get your money back. And because crowdfunding companies often aren’t public, they don’t have to disclose as much about their business finances and operations.

It’s important to note that crowdfunding investments often are only available to Securities and Exchange Commission (SEC)-defined accredited investors. For an individual to be an accredited investor, they must have at least $200,000 in annual income (or $300,000 with a spouse); a net worth of more than $1 million; or a Series 7, 65, or 82 license.

Purchase Stocks, Mutual Funds, or ETFs

Another way you can indirectly invest in farmland is through the purchase of related stocks, mutual funds, and ETFs. Investing in stocks gives you the opportunity to invest across a broad spectrum of farming-related companies, from those that grow crops to producers of farming fertilizers to processors that ensure the food ends up on people’s tables.

  • Stocks: When you buy a farming stock, you’re buying a piece of ownership in a single agriculture business. By purchasing individual stocks, you can choose exactly which company (or companies) to support.
  • Mutual funds: An agriculture-themed mutual fund allows investors to buy ownership in many different farming companies, all by purchasing a single security. An agriculture mutual fund is likely to include holdings from many different parts of the agriculture sector.
  • ETFs: An agriculture ETF is similar to a mutual fund in that both are baskets of many different stocks within a single fund. They allow investors to spread their money across many different companies by investing in a single security. The difference is that while mutual fund trades are executed at the end of the day, ETFs can trade throughout the day, like stocks.

Investing in these agricultural securities can help investors diversify their portfolios. Rather than investing in a single piece of farmland, you can benefit from the performance of farms across the country, as well as other parts of the agriculture industry. These investments may also have more liquidity than farmland itself.

One downside to consider is that while the returns of farmland aren’t strongly correlated with the overall market, that may not be the case for agriculture securities.

The Bottom Line

Investing in farmland can be an excellent way of diversifying your investment portfolio. Farmland is unique in that its performance isn’t necessarily correlated with the rest of the market. As a result, it can be a hedge against market downturns. And, as we’ve established, there are plenty of ways to invest in farmland, whether you prefer a direct or indirect investment.

But as with any investment, it’s important you do your research first. Any type of investment has some inherent risk, and farmland is no exception. Consider your investment goals, and research any individual investments you’re considering adding to your portfolio.