Upon hearing the words “real estate,” many people immediately think of residential properties.
For 28.1 million Americans, however, real estate is about more than finding a place to live. It’s about building wealth through investment.
For savvy investors, real estate can be a high yield investment with huge payoffs. That said, as is the case with any investment, there are also risks when investing in real estate. The housing bubble and 2008 market crash comes to mind.
That said, houses aren’t the only kind of real estate available to invest in. For instance, many investors work exclusively with commercial properties or farmland.
Could farmland be a high yield investment for your portfolio? Let’s take a closer look.
What is a high yield investment?
Before we begin weighing the benefits of investing in farmland, let’s define some terms. How do we determine what constitutes a high yield investment? There are varying definitions.
Essentially, whenever you make an investment, you are looking for interest or a dividend or you are hoping that whatever you purchase now will be worth more money down the line.
When an investment has high yield, that means that it gains value over a relatively short period of time either through interest and dividend or appreciation.
That said, you’ve probably heard the phrase “No, risk, no reward.” This is definitely true when it comes to investing in land. While high-yield investments can have high payoffs, they also present a greater risk than an investment that gains modest amounts of value over a longer period of time.
Will farmland increase in value?
Asking the question, “If I buy farmland, will it increase in value?” is a bit like asking, “If I buy a car, will it get in an accident?”. To put it simply, it depends.
To a certain extent, land is typically a good investment, because it is a non-renewable resource. You can’t make new land!
That said, while some properties can quickly increase in value, others could require years to produce a good return.
There are a few factors that determine the potential of a particular piece of land to be a high yield investment.
For instance, Realtors are often quoted as saying that there are only three things that matter in real estate: “Location, location, location.” This is definitely true when it comes to farmland.
For instance, a piece of land that is closer to a city or a large town will likely increase in value more quickly than remote land.
Additionally, the physical features of the farmland will greatly impact its value.
Before purchasing a piece of farmland, you should always have a soil test done. This will give you information about what kind of nutrients there are in the soil, and how productive the land would be for growing crops.
How can you make money with farmland?
When you purchase a piece of land, it is a tangible investment. Unlike a stock portfolio, it is real. You can actually travel to your farm land, build memories, walk on it, and work on it.
Also, with intangible investments, investors typically make the purchase, wait for the value to appreciate, and then sell their shares.
With land purchases, however, this strategy is less effective. For one, if you don’t manage the land, it will be less likely to increase in value.
And, even if the land does increase in value on its own, buyers will be willing to pay more for land that is well maintained and ready to use.
Additionally, by working the land you invest in, you can potentially leverage your investment to earn even more money.
If you’re interested in monetizing your farmland, you have a couple of options.
Of course, the most obvious way to make money with farmland is to raise crops and animals. These resources can be cultivated, and then sold.
While farming can be very profitable, it also requires labor and overhead costs.
Another option for owners of farmland is to develop their land into a commercial property. For instance, many farm and ranch owners develop their land into retreat centers, and host corporate groups, or tourists.
Additionally, some pieces of land come with natural resources that can be sold for profit. For instance, some properties have valuable timber. You should consider these factors into your costs when purchasing farmland.
Getting a good deal on farmland
No matter how you plan to make money with your farmland, the process begins with the initial purchase.
The better deal you get on the farmland when you purchase it, the more potential you have to develop the land into a high yield investment.
If you are fortunate enough to have the funds on hand to make a cash offer on a piece of property, you will definitely have good leverage to get a great deal.
Most buyers, however, need financing when purchasing a piece of farmland.
If you’re going to be using financing, it’s a good idea to speak with a professional who is experienced in rural markets. Depending on where you live, the bank or credit union you used to get a loan for your house or car might not be a good resource for buying farmland. Many times there are Coops such as Northwest Farm Credit Services that can save you both on interest rate as well as being able to deal with someone directly.
In some areas, the government subsidizes low interest, zero-money-down loans through the United States Department of Agriculture. Researching these programs could lead to big savings on your initial costs.
Another factor to consider when purchasing a piece of farmland is what is included in the price of your purchase.
For instance, does the purchase price include any farming equipment? Are there existing buildings on the property? Are those buildings in good condition, or will they need to be renovated?
Additionally, think about whether the land is suitable for what you plan to use it for. For example, if you plan to raise livestock, does the property already have fences, or will you have to build them?
Before you purchase a piece of property, you should make sure that the contract clearly outlines exactly what will be included.
If you’re ready to start investing in farmland, contact us. We’ll connect you with a real estate professional who will help connect you with the perfect property.
If you enjoyed this article you might want to read one of our recent reports. Montana Land for Sale Values(Factors Affecting MT Land Values) or Montana Ranches for Sale Real Estate Report 2017 both are longer , more in depth reads.
Buzz Tatom is a Partner at Venture West Ranches. He moved to Montana 5 years ago and still owns the 5T ranch in Texas. He has a BBA from Texas Tech and an MBA from SMU. He built his Printing/Marketing firm 10 fold over 24 years before selling in 2011 and is involved in a number of business ventures. He enjoys teaching part time at MSU in business and mentoring students.