With the stock market at a record high but making dips and dashes thanks to Coronavirus, investors are looking for alternatives, particularly in real estate. Rural real estate.
Did you know farmland is the last great untapped asset class? Farmland currently represents an almost $9 trillion market globally with historically high returns and low volatility. A growing population coupled with a rising demand for high-quality food, a finite and decreasing supply of land: farmland will only become more essential over time. Savvy institutional investors are beginning to take notice, but for most investors, the farmland market remains fragmented, confusing, and costly to enter.
Until now. New applications of technology have the potential to make farmland a fully-fledged asset class akin to real-estate. Companies now make it simple for an average investor to diversify their portfolios with access to vetted farmland deals. All you need is a guide.
Like Clayton Pilgrim. A licensed real estate agent and third-generation farmer with Century 21 Harvey Properties in Paris, Texas, I have never met anyone who knows farm and ranch as deeply or as thoroughly as Clayton. Throughout his career, he has been in production agriculture from on the ground operations to large scale management. Pilgrim is involved in private investment in farms, ranches, and recreational tracts throughout East Texas and Southern Oklahoma. He is a member of the Realtors Land Institute, an Accredited Land Consultant and on the board of the Future Leaders Committee. He is the grandson of the late billionaire chicken producer Lonnie “Bo” Pilgrim. He resides in Paris, Texas with his wife, Kristy, and daughter, Caroline.
CD: From the beginning of time, farmers have been an integral part of feeding the public. Many technological changes have impacted the farming industry, from the invention of the plow to more modern advances, such as GPS technology, irrigation, and drought-tolerant seed varieties. Many facets have changed but one has not is the dirt. So why invest in farmland?
Pilgrim: Investing in land is a simple process of purchasing property and creating value through: revenue, appreciation or tax benefits… isn’t investing in farm and ranch that simple?
Although it sounds that simple, many investors don’t understand the difficulty in selecting properties that make sense for their investment goals. Listed below are a few short items to look at before investing in farmland.
CD: Why is it so important to know a professional?
Pilgrim: Many investors, both large and small, make the mistake of not employing a professional that has the knowledge of the industry/market and can care for their money. Many times, through my real estate career, investment experience, and as a farmer myself, I have seen investors not use the correct professional with knowledge of the land.
When looking to diversify with farmland, seek a real estate professional with historical and proven confidence in the area. Typically, land professionals are part of organizations like The Realtors Land Institute where land is the single most asset class, they deal in. To go further, Accredited Land Consultants are trained and accomplished in the industry, of which only a few hundred agents have acquired the designation worldwide.
I use the quote, “I will not go to a heart doctor to get my hip replaced.” A Realtor with whom sells homes in an urban area would not have the specific expertise to know the farm and ranch industry and understand the investment quality of a property. A farm and ranch real estate agent would not know about condominium prices in downtown.
CD: What are some of the benefits to investing in farmland?
Pilgrim: One of the best benefits known to investors is the ability to have land as a tangible asset. This is especially important when a portfolio is heavily invested in the stock market. Another benefit we see in farmland is the tax deduction in relation to depreciation. Many farms contain improvements that depreciate such as grain storage, irrigation pivots, shops, barns and etc. An owner can depreciate some of these assets each year to offset yearly taxes. Always ask your favorite CPA for more information.
CD: Can you lease, farm or sharecrop your property, to make money?
Pilgrim: Absolutely. The value of farmland has increased over the last several years due to an increase in demand for food and fiber globally. The United States has some of the best potential farmland for investment because of our democratic government and the infrastructure it possesses; ie, railroads, rivers and highways. Other countries have very fertile soil but have no roads to deliver products to a port, and it makes for a hard harvest. Also, some foreign countries have great land to grow crops but have a corrupt government and/or the state owns all the ports of exchange. Not all international investments are bad they just are more volatile than the U.S.A.
CD: How would you advise a buyer to best evaluate a farm for purchase?
Pilgrim: When selecting a farm to purchase, an investor needs to keep three simple points in their process. Do I have the capital to make the investment? Do I feel comfortable in a long-term project? Can I leave emotions aside when purchasing/selling?
- Knowing your buying potential, aka how much can you spend, is key when purchasing farmland. Some investors move capital into the property with no debt and many move some capital and acquire debt through lenders. Lenders are everywhere and, in my opinion, choose a lender that understands farmland and its characteristics. There are options for government loans through the USDA and other government entities as well. Consult your land professional to direct you to lenders that can help.
- Farmland investing, for the most part, is a long-term project. Many investors buy land and hold it for extended periods of time to get the most return. Many large investors may hold land for as long as 10+ years to see the returns. The farm economy goes in cycles much like the economy, which as a whole goes up and down. To see real potential in farmland, one must be ready to hold on through at least 5+ years.
- Emotion is always on the table when it comes to tracts of land. Throughout my career, I have fallen victim to getting emotional towards a piece of property. This is a definite thing to remember when it comes to you and your family’s financial future. Leave emotions at the door. The phrase, “time is money,” can go both ways. Waiting two years to purchase because it makes more sense financially or selling now because you have a willing buyer, may factor into your decision. Remember, “A bird in the hand is worth two in the bush”.
CD: When do you know to “let go” and divest of the farm property, even if its a family legacy?
Pilgrim: After the asset has reached potential or maybe you are ready to buy a new investment, it is time to liquidate. Selling the property is as important as the day you purchase. I cannot express the importance of using a qualified professional. Visit the Realtors Land Institute when it comes time to sell your investment. The right professional can elevate your sales price, alleviate hassle, and supply you with confidence to the day of closing. When selling farmland, a land professional must qualify buyers and must advertise to the masses. This requires a tailored marketing program and someone with whom has the skill set to vet buyers and make sure qualified candidates can meet or exceed the requirements to get to the closing table.
Investing in farmland is very rewarding if done correctly. The key to remember is to surround yourself with qualified people to help you make decisions. This is your money and your future, happy hunting.