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When you hear the saying “rental property,” most people think of a duplex of some sort. However, land can actually be rented out as well.
Farmland has been providing investors with consistent returns over the last few decades, all while having significantly less volatility than the stock market. In recent years, popularity of this alternative asset class has grown tremendously.
Here's a few of the reasons why more and more people are investing in farmland:
- It is resistant to inflation making it a good hedge
- Farmland is a tangible asset whose value historically grows over time
- It diversifies your portfolio
- You can earn money from rents paid or a percentage of crop yield
- In addition, it is likely investors will see increases in the value of the land
- Low correlation to the stock market
However, investing in farmland comes with many unique risk factors that do not apply to other investments out there. For example, risk of pests/infestation of crops or weather risk. All of this must be considered before investing.
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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.
A trend we have been seeing 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. 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. However, one downside to owning land is the lower liquidity. Unless you are trading farmland REITs, it is not easy or fast to sell off your investment.
How Do You Buy Farmland To Rent Out?
Of course, you need to own some land before you rent it out to a prospecting farmer. How do you go about that?
One option is to buy land directly by locating a deal for usable cropland. 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 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 on.
In a nutshell, 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 leg work and rental agreements for you.
Consider AcreTrader for example:
- The minimum investment per deal is around $10,000
- A team of experts source the deals and manage 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 that you are looking 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 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.
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 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.
During a good year for crops, this could mean more upside for the owner of the land. 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 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?
Keep in mind, 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 in rent? If you go too high, it could take months or years to find a tenant. Too low could mean leaving money on the table.
A fair rental rate includes several factors, including:
- Local market rents
- Demand for farmland in the area
- Lease term
- Weather trends
You may want to talk to a local land agent who would be better served to give you an estimate. They may take a commission, but it could be worthwhile to get an optimal market rental rate.
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?
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.
Owning land and renting it out yourself can be very profitable, but it is certainly a lot of hard work. For those looking for an easier way to invest in farmland, check out these top farmland investing sites!