How Does Renting Farmland Work?

Key Points

• Farmland is increasingly popular as an investment vehicle that can solve issues encountered by residential rental operations.
• Investing in farmland diversifies portfolios and provides a tangible asset resistant to inflation, increases in value over time, and is not correlated with the stock market.
• Renting out farmland requires less work than owning and operating it, but landlords must also consider risks such as weather and pests before investing.
• Landlords can either buy farmland or invest via an online platform.
• After acquiring land, landlords can arrange leases, including fixed cash, custom farming, or share-cropping leases.

When you hear the term “rental property,” few people immediately think of farmland.

Most people think of a single-family home or duplex.

However, farmland isn't just another alternative rental vehicle; it solves many issues residential renter operations face.

Farmland has provided investors with consistent returns over the last few decades, all while having significantly less volatility than the stock market. In recent years, the popularity of this alternative asset class has grown tremendously.

Here are a few of the reasons why more and more people are investing in farmland:

1. It is resistant to inflation, making it a good hedge
2. Farmland is a tangible asset whose value historically grows over time
3. It diversifies your portfolio
4. You can earn money from the rent paid or a percentage of crop yield
5. In addition, investors will likely see increases in the value of the land
6. Low correlation to the stock market

It's easy to understand why investors are increasingly interested in farmland investments. However, the returns are more appealing for most investors than the work.

Owning and operating a farm requires extensive experience and huge time investment. This is why renting the land to a farmer/operator is ideal for many investors.

While there are certainly benefits, some unique risk factors with farmland do not apply to other investments. For example, risk of pests/infestation of crops or weather risk. All of this must be considered before investing.

So, how does renting farmland work? What do you think an investor should consider? Let's dive in and take a look!

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Is Renting Out Farmland A Good Idea?

Millions of farmland are leased out by smart owners who see the value both short term and in the long run.

Across America, there are about 911 million acres of farmland, according to the U.S. Department of Agriculture (USDA). Farmers and ranchers own approximately 60% of their land, renting the rest from third-party landlords.

A trend we have seen over the years is more landlord farmland owners. Rather than owning the land and farming it yourself, many investors have capitalized on the opportunity to own the land itself and rent it out to farmers.

Over the last 50 years, the value of American farmland has risen by about 6.0% annually. When you add in the cash rent brings in, the return on investment can be even more outstanding.

Since 1990, farmland has produced a positive return every year. According to the USDA, farmland brings an average annual return of 11.5%.

Investors will have other benefits along with this above-average return. For example, farmland returns have been found to have low volatility when compared to other assets, including U.S. Treasury Bonds.

Investing in farmland and renting it out has been a fruitful venture for many, and it will likely be a good opportunity in the future.

However, one downside to owning land is the lower liquidity. Therefore, unless you are trading farmland REITs, selling off your investment is not easy or fast.

How Do You Buy Farmland To Rent Out?

Of course, you need to own some land before renting it out to a prospecting farmer. So how do you go about that?

One option is to buy land directly by locating a deal for usable cropland. However, you will likely need tens, if not hundreds, of thousands of dollars.

Another option would be to secure a loan from a bank for a land purchase.

U.S. cropland value averaged $4,100 per acre in 2019, an increase of $50 per acre (1.2 percent) from the previous year. Today, the average farm size is just under 455 acres.

There will, of course, be some variables about the value of the farmland, including factors like the soil quality, the crop's worth, the parcel's size, the demand for farmland, and how long the land has been farmed. 

You should probably know a thing or two about farming before you go out and buy land to rent out.

A much easier option is to invest via an online farmland investing platform. They handle all of the legwork and rental agreements for you.

Consider AcreTrader, for example:

• The minimum investment per deal is around $10,000
• A team of experts sources the deals and manages everything for you
• You can pick and choose specific farms to invest in

If that interests you, click here to view the current offerings on AcreTrader!

What Kind Of Rental Agreement Can You Arrange?

Assuming you have some land you want to rent out to a farmer, the next step is figuring out the legal structure of the agreement.

In general, there are three types of leases for farmland:

1. Fixed Cash Lease

This is a set payment agreement made up-front and does not allow any adjustment.

This means the farmer renting the land will pay the same amount without any modifications based on yield, market prices, or crop production.

The landowner will be guaranteed the rent he will receive, but the farmer relies on the harvest's success to make money.

If the weather is excellent and Mother Nature cooperates, this could be a banner year for the farmer renting the land. However, the reverse is also possible when unforeseen factors cause productivity to plummet.

This type of agreement puts almost all of the risk on the farmer.

2. Custom Farming Agreement

Custom farming agreements are an alternative to leasing farmland. This option is not based on crop productivity and pays the farmer for his work on the land.

In this case, the renting farmer is paid a fixed rate per acre for completing each step in the cycle of growing crops. The renting farmer has assured his payment regardless of production.

In return, the landowner pays for all seeds, fertilizers, watering systems, etc., and keeps all crop and commodity payments. The landowner is also responsible for marketing and selling the crop.

This could mean more upside for the landowner during a good year for crops. However, in a bad year, you share the risk/downside.

 3. Crop Share Lease

A crop share lease may be the most equitable lease for both sides that you can draw up.

This option allows both parties to act like partners to ensure a successful harvest.  As the landowner, you would supply the equipment, seed, fertilizers, and other elements necessary for a healthy crop.

The farmer renting the land would do all the physical labor. A crop share lease indicates your willingness to share in the production risk of farming. It does not place the chances of a poor season solely on the shoulders of the farmer.

This type of lease often works well because both parties will work toward the same end goal; a flourishing harvest.

How Should You Structure A Rental Agreement?

Just to let you know, we are not legal or real estate professionals.

However, here are some general guidelines to consider when drafting a rental agreement.

First of all, how much should you charge for rent?

If you go too high, finding a tenant could take months or years. Too low could mean leaving money on the table.

 A fair rental rate includes several factors, including:

1. Local market rents
2. Demand for farmland in the area
3. Lease term
4. Weather trends

You should talk to a local land agent who is better served to give you an estimate. They may take a commission, but getting an optimal market rental rate could be worthwhile.

Who Covers Costs?

Owners are typically responsible for paying taxes and insurance on the property because it is held in their name.

However, they often pass routine costs to their tenants, such as electricity, repairs, and maintenance.

Other things to consider in the rental agreement are:

• How long will the lease last?
• Is the lease flexible for reassessing on an annual basis?
• Who will be responsible for major repairs?
• Can the tenant make improvements to the property or buy equipment?

Do You Need Insurance?

The short answer is “yes.” You are classified as a business owner if you profit from land rental.

Because of this, you have specific liability exposures that could cost you enormous amounts of money.

Conclusion

Buying into and renting out farmland can be an excellent investment.

You're promoting an industry that puts food on the tables of families worldwide, supporting the tradition of passing farms along through generations and helping ensure the land is protected from deforestation and development.

Farmland is an investment that may help you increase your net worth and improve your social responsibility.

This is a sponsored promotion for the AcreTrader platform. Farmland Riches, LLC and it's members may have investments in companies represented on the AcreTrader platform. This informational post is by no means a promotion, solicitation, or recommendation of any specific investment.