Investors nervous about the stock market and in search of better returns than a money-market fund might consider plowing cash into farmland, say some financial planners.
By acquiring and renting out high-quality acreage, investors can book a 3% to 5% annual return from rental income and, over time, might rack up an additional 5% or so per year in appreciation, says R. Dennis Moon, managing director of specialty asset management at U.S. Trust, a unit of Bank of America Corp.
Farmland investing doesn’t come without risks, though. In order to smooth out price fluctuations, investors are advised to hold their property for at least five years. And if a farmer who’s renting your land goes bust and you can’t rent out the land again quickly, even the income proposition gets iffy.
That means doing some legwork is essential. Investing in farmland often requires a trip to the county assessor’s office and the local farm extension office to compare sale and rental prices. Mike Duffy, an economics professor at Iowa State University, says investors “need to be sure about what they’re buying, because land isn’t a homogenous commodity.”
One of the challenges in the current market is finding quality land. The supply is smaller than usual because farmers and their heirs are keeping land they otherwise might have sold, in order to book the rental income. “The number of high-quality farms offered on the market is down 30% to 40%,” says Loyd Brown of Hertz Farm Management Inc. in Nevada, Iowa, which specializes in farm management and acquisition. “Even medium-quality land is 20% to 30% less available for purchase.”
While wealthy investors can afford to roll up multiple tracts at a time, people of lesser means can buy smaller farms of 80 or 160 acres. Some lenders make mortgage loans for up to 60% of a tract’s value, though mortgage payments eat into rental income.
Another option: using a farm management company. Such firms locate land, advise on improvements and manage rental agreements, which vary depending on the size and type. The most common arrangement is a cash deal in which the farmer agrees to a certain price and pays several months upfront.
Other kinds of agreements allow investors to be more involved with what’s grown and to get greater returns—but they also require investors to take on more risk. The owner may provide the seed, chemicals and fertilizer, for example, in exchange for some of the revenues from crop sales.
Craig Karsen first bought farmland in the mid-1990s in Iowa because “I was looking for diversification,” he says. The retired securities trader, who lives in Chicago, sold about 900 acres from 2003-05, booking a 100% appreciation on top of 5% annual income.
In December, Mr. Karsen bought more. “I think it’s a good hedge against inflation against inflation, and it’s conservative,” he says.
Conservative for a stock trader, that is.
Write to Jilian Mincer at email@example.com