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Farmland is an outstanding commodity.
It is resistant to inflation and remains a sizable, tangible asset whose value historically grows over time. It diversifies your portfolio. You can benefit from either the earnings from crops or the money paid by renters.
In addition, it is likely investors will see increases in the value of the land. And lastly, property value isn’t contingent on the rises and falls of the stock market.
Is Renting Out Farmland A Good Idea?
Millions of acres of farmland are leased out by smart owners who see the value both short term and in the longer run.
Across America, there are about 911 million acres of farmland, according to the U.S. Department of Agriculture (USDA). Farmers and ranchers own about 60% of the land they use, renting the rest from third-party landlords.
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 is 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. 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 in the past, and it is likely going to be a good opportunity in the future.
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How Do You Buy Farmland To Rent Out?
One option is to buy land directly by locating a deal for usable cropland, but keep in mind this requires a large chunk of costs upfront, because you would need to buy a good-sized amount of land.
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 quality of the soil, the value of the crop, the size of the parcel, the demand for farmland, and how long the land has. been farmed.
Or you could acquire land that's not currently being used for agriculture and converting it to cropland or pastureland. This option has both pros and cons. On the plus side, converting unused property into farmland instantly makes the land more profitable. You would be able to buy low and then reap all the benefits as a landlord.
On the downside, this option requires the most work since you would need to transform the land to farm use. After that, you would need to attend to details such as preparing the soil, finding the right crops and locating tenants for the new farmland.
A much easier option is to invest via an online farmland investing platform. They handle all of the leg work and rental agreements for you.
However, if you choose to do it yourself, here's more information!
What Kind Of Rental Agreement Can You Arrange?
In general, there are three types of leases for farmland.
1. Fixed Cash Lease
This is a set payment agreement that’s made up-front and does not allow for 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 success of the harvest to make money.
Sure, if the weather is great 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.
2. Custom Farming Agreement
Custom farming agreements are an alternative to leasing farmland. This option is not based on crop productivity, and in essence, 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 is assured his payment regardless of production.
In return, the landowner pays for all seed, fertilizers, watering systems etc. and keeps all of the crop and commodity payments. The landowner is also responsible for marketing and selling the crop.
3. Crop Share Lease
A crop share lease may be the most equitable lease for both sides that you can draw up.
This is an option in which both parties act like partners to ensure a successful harvest. As the landowner, you would supply the equipment, seed, fertilizers, and other elements necessary to 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 risks of a poor season solely on the shoulders of the farmer.
This type of lease often works well because both parties will work to the same end goal; a flourishing harvest.
How Should You Structure A Rental Agreement?
A fair rental rate includes several major stipulations, including:
- Reflects local agricultural and market conditions
- Compensates the owner for costs associated with property ownership
- Allows the tenant to operate a viable farm business
- Stipulates the renter must maintain the property in good condition
Owners are typically responsible for paying taxes and insurance on the property because it is held in their name. However, they often pass on other 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? If so, who will pay for them?
In general, the first step to structuring a rental agreement is deciding what type of agreement you want to arrange first.
Do You Need Insurance?
The short answer is “yes.” You are classified as a business owner if you are making money from land rental.
Because of this, you have certain liability exposures that could end up costing you an enormous sum of money.
Buying into and renting out farmland can be an excellent investing move.
There’s a long list of benefits including a historically strong return on investment. There are ways to find the fair value of the land and draw up a lease that’s equitable for both the farmer and the landowner.
But there’s something else to be said about owning and renting out productive farmland. You are promoting an industry that puts food on the tables of families across the world, giving support to 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 not only increase your net worth, but also improve your social responsibility.