Many real estate sub niches like office space, apartments, shopping malls and self-storage are available to investors. One that is often overlooked is farmland. After all, only 17% of the available land in the U.S. is dedicated to farming. Like other real estate investments, it has low correlation with standard markets, which provides diversification.
Other benefits of farmland include having multiple streams of income and being an inflation hedge. It’s easier to gain exposure to farmland via Farmland real estate investment trusts (REITs), crowdfunding platforms and exchange-traded funds (ETFs).
Additional Benefits of Farmland
Multiple Streams of Income: Aside from the land itself, farmland can yield income from selling crops like wheat or soybeans. These commodities tend to offer higher returns during times of high inflation. Other sources of income can include billboards, hunting leases, timber sales and renewable energy.
Farmland can take advantage of increasing demand for renewable energy by housing wind turbines and solar panels.
Inflation Hedge: The amount of farmland in the U.S. is decreasing every year. However, its farms represent 10% of the world’s farmland. Farmland also plays a significant role in the U.S economy since agriculture accounted for $1.055 trillion in the U.S. economy during 2020.
This scarcity and importance to the economy increase demand for this resource. Like gold, farmland has a finite supply, making it a potentially great hedge against inflation.
Potentially Recession- and Pandemic-Proof: Many real estate industries seemed immune to recessions. However, the COVID-19 proved this wrong as some real estate sub niches like office space and shopping centers took heavy hits.
Remote work and shutdowns greatly reduced the demand for those sectors. On the other hand, farmland can be immune to this since it’s a source of food.
One easy way to gain exposure to farmland is by investing in REITs. Generally, REITs buy farm land and lease it to farmers. Farmland REITs also offer exposure to different farms in various geographical areas, providing greater diversification as opposed to investing in just one farm.
These farmland REITs are more liquid than physical land since they can be bought and sold easily. They’re especially liquid if they’re publicly traded since you can buy and sell them online with traditional brokerages like Fidelity, which offers free ETF trades.
One of the more established farmland REITs is Gladstone Land Corp. (NASDAQ: LAND). This company buys and leases farmland throughout the country. It has a healthy three-year revenue growth of 27% and pays a 1.73% yield.
However, this REIT isn’t perfect as it seems overvalued because of its price/cash flow ratio of 29.54%, which is much higher than the index’s price/cash flow ratio of 16.58%.
Several crowdfunding platforms specialize in farmland. Two examples are Steward and FarmTogether.
Steward: Steward is a unique platform that lets users lend and borrow funds in the agriculture sector. Unlike most crowdfunding platforms, it focuses on debt, not equity investments.
Investors can loan money to agriculture projects for as little as $100. This platform is open to both accredited and non-accredited investors. The typical interest rate per project ranges from 5% to 10%, and it doesn’t charge fees for lenders.
FarmTogether: FarmTogether is a more traditional crowdfunding platform that lets investors pool their money together with other investors to fund agricultural investments. These investors become fractional owners, proportional to the amount they invest.
This crowdfunding platform is meant for accredited investors and has high minimums. It has a few offerings, which include Oak Ridge Pistachio Orchard and its Sustainable Farmland Fund. The Oak Ridge has the lowest minimum which is $15,000, while investors need to pony up at least $100,000 for the Sustainable Farmland Fund.
These current offerings have internal rates of returns (IRRs) around 10%, which are higher than average yields with a low correlation to traditional markets. But, these come at a high price because of the substantial minimum investment requirements.
Like REITs, ETFs are a great way to add farmland to your portfolio without a high initial investment. They’re also more liquid than physical land since they can be bought and sold on public stock exchanges.
ETFs primarily invest in REIT equity companies, with many of these ETFs being passively managed. One passively managed REIT ETF is the Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ), which tracks the MSCI U.S. REIT index. This fund has a low expense ratio of 0.12% since it tracks the benchmark, instead of trying to outperform it.
One popular farmland ETF is the iShares MSCI Global Agriculture Producers ETF (NYSEARCA: VEGI). Like Vanguard’s REIT ETF, it’s also passively managed, and it tracks the MSCI ACWI Select Agriculture Producers Investable Market Index. It also has a low expense ratio of 0.39%.
This fund invests in agricultural companies that produce fertilizers and agricultural chemicals and farm tools like machinery. It has holdings that specialize in packaging foods and meats. One of its most popular holdings is agricultural equipment manufacturer Deere & Co. (NYSE: DE).
Farmland is an overlooked real estate sub niche that can provide more stability and different sources of income than others. It tends to be recession- and pandemic-proof since people will always need to eat.
You don’t need to invest directly in farmland to reap the benefits of this unique asset class. Instead, you can invest lower amounts into farmland REITs, crowdfunding platforms and ETFs.
Photo by Fotokostic on Shutterstock
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