You’ve probably heard about farmland investing and how it’s a great way to diversify your portfolio or hedge against inflation – but do you know what a farmland REIT is? That’s what I’ll be unpacking a bit more for you today. Before we get into that, though, hands up if you’ve considered farmland investing because of all the good things you’ve heard about it…
But who the heck knows how to own and run a farm??? Enter management companies – now that you can buy into! Generally speaking, people tend to outsource or just pay extra for the convenience that comes with somebody else doing certain tasks that they’re not fond of on their behalf.
I like to believe that’s how the concepts of farmland REITs were birthed, as a way of getting people with a common interest together and leveraging on their varied skills and resources. But what exactly is a farmland REIT?
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What is a farmland REIT?
A farmland REIT (real estate investment trust) is a company that is created solely for the purpose of holding real estate, which, in this case, would be farmland. A company that buys and manages farmland, meaning that you don’t have to get involved with the day-to-day operations when you own it.
Let’s face it, one of the main things that scare people out of investing in this golden opportunity is the actual overseeing of farmland because it’s complicated! A farmland REIT is considered one of the easiest ways to get a foot in the door when it comes to farmland investing.
How to buy a farmland REIT
If you’re an avid investor, you probably have some sort of understanding of regular stocks and how they work. REITs are stocks so to buy into a farmland REIT, you just have to purchase shares using your favorite stock trading platform.
If you don’t have a favorite I have gone through and found what I think is the best trading platform. Then you’re off to the races to get your share of the farmland REIT action, and possibly even dethrone Bill Gates as the owner of the most farmland in the US.
What makes a farmland REIT special?
Okay, so by now you’re probably asking yourself, what makes a farmland REIT so special, and what’s with all the hype? Well, for starters, REITs aren’t subjected to corporate taxes. In addition to not having to pay corporate taxes, a farmland REIT has to pay out a lot of dividends – that’s a BIG WIN for investors who get cash in their pockets.
One requirement of being granted REIT status by the IRS is that the company must pay 90% of its profits as dividends back to investors. BUT, at the same time, it makes it difficult for those companies to invest in themselves. So investing in these is usually more of an income play than a growth mindset one.
Don’t let that deter you from investing in a farmland REIT, dividends make the whole equation of how to live off of an investment very simple. What do I mean by this? If a company you buy has a 3% dividend and you have $100,000 invested with them, you can (somewhat) count on getting $3000 per year from them forever.
The biggest draw for a farmland REIT though is that farmland is notoriously recession-proof and inflation-proof. Food prices determine inflation and it happens to be kind of a staple – recession or not. Awesome.
How are farmland REITs taxed?
REIT dividends are usually counted as income instead of capital gains since the government has to charge taxes somewhere.
This means that if you have invested in a farmland REIT, you will receive the pre-tax dividends that you will have to pay ordinary income tax on. This is unlike dividends from other stocks which are often treated as capital gains.
So what about the tax implications if I sell my shares in a farmland REIT? If your shares were held for less than a year then they get short-term capital gain treatment. If held for a year or longer, long-term capital gains rates apply.
Farmland REITs vs farmland crowdfunding
You probably have a pretty good idea what a farmland REIT is by now and what it entails, but the other big contender is crowdfunding.
Farmland crowdfunding is a relatively newer way of investing in farmland. It’s no secret that before all these options came to the fore, getting a foot in the door in farming was quite demanding, financially that is.
Farmland crowdfunding is essentially a collective that purchases actual farms – as opposed to a farmland REIT which is purchasing shares in a company that owns farms. The biggest thing for me is that REITs fly around with the stock market since they are stocks. This defeats the purpose of owning a farm for the purpose of balancing inflation and recessions.
A farmland REIT offers a lot more liquidity than farmland crowdfunding, but crowdfunding gives you the satisfaction and benefits of directly owning a farm.
What about agriculture REITs?
Investing in agriculture is something that some investors are turning to, mostly because it has a relatively higher chance of consistent returns and there is a growing demand. The concept of an agriculture REIT is somewhat similar to a farmland REIT.
With an agriculture REIT, you’d be purchasing shares in a company that deals with agricultural operations. This may be in the form of land or anything related to the agribusiness industry. Essentially, an agriculture REIT is slightly more all-encompassing than a farmland REIT.
If you’re still questioning why one might invest in an agriculture REIT, the fact is, they are super related and will have the same pros (wealth protection) and cons (some investments are more lucrative if they don’t crash).
Top 2 farmland REITs
The two main farmland REITs that investors can consider are Gladstone Land Corporation (LAND), and Farmland Partners Inc. (FPI).
1. Farmland Partners Inc
- Ticker Symbol: FPI on the NYSE
- Holdings: $1.1B in real estate book value alone.
- Types of Holdings: 160,000 farmed acres owned across 18 states and 25 types of crops.
- Price Growth Rate: 7.42% since 2018, 0% since 2014
- Listed since 2014
- Annual dividend yield: 1.86%
- Debt: $427M (37% of book value)
There is some talk about FPI having some difficulties a while back but overall you can see that over the past 5 years at least it has matched the S&P 500 returns.
- Ticker Symbol: LAND on the Nasdaq
- Holdings: 1.35B$ in book value.
- Types of holdings 115,000 farmed acres and 45,000 Acres of water bank in California.
- Price Growth Rate: 6.2% since 2018, 2.01% calculated from 2013
- Dividend yield: 3.05%
- Founded in 1997 listed in 2013
- Debt: $762M (56% of book value)
LAND skyrocketed during covid as the highly leveraged growth play in farming but due to leverage its returns haven’t been so great and it’s fallen off a cliff again.
Crowdfunding Comparison: AcreTrader
- Typical holding period: 3 to 8 years
- Founded in 2018
- Returns: 11%
- Debt: 0%. All the farms are owned free and clear by AcreTrader investors and then run by local farming experts.
- Ticker Symbol: You have to invest in shares on their platform
- Holdings: You actually choose and invest in a special purpose vehicle (SPV) that owns a specific piece of farmland.
- Types of holdings: Farmland and Timberland
- Price Growth Rate: Since you have invested in a SPV that owns a farm individually each farm is held by its own entity. You can openly view exited offerings managed by AcreTrader on thier site.
AcreTrader’s goal is to make it easy to invest directly in farmland (as opposed to a REIT) so they can extend the opportunity to a lot more people. I like them A LOT as the SPV in which you invested own each farm individually and debt free so you don’t get into any issues with interest rates, inflation or corporate governance holding you down.
Frankly, I think anyone who doesn’t sign up at least to see the possible investments is nuts.
I do want to especially let people know that AcreTrader does give a kickback to me if people sign up with them. They didn't pay me to write this post, and I wrote it because I do truly believe in the digital platform they set up and the general idea of investing in farmland, although I don't have any opinion about any specific type of farm...that’s what they are for, farms all look the same to me. However, due to financial regulations, I need to put an extra disclaimer.
This is a sponsored promotion for the AcreTrader platform. FiveYearFIREescape 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.
Honorable mention: Iroquois Valley
Iroquois valley is the tiny underdog, feel-good, socially responsible investing one of the bunch.
They own organic farms and help farmers convert over to organic farming practices. They however don’t have liquidity like LAND and FPI (as it’s a private investment platform) or the returns of AcreTrader so I really can’t feel justified recommending them.
But there are only 10 full-time employees and they make under $2M, so that’s kind of fun!
My top recommendation
That being said, I recommend AcreTrader because of super recession-proofing and inflation-proofing benefits of direct farm ownership.
- No debt, so interest rates are relevant. The whole point of farmland is an inflation/recession hedge so why tie yourself back into that system with debt? That’s stupid.
- Not publicly traded so market fluctuations don’t exist. I am very open about the idea that owning downturn-resistant stocks (REITs vs crowdfunding) doesn’t work that well.
- Great historical results (15% for your inflation protection, wow!)
They have extensive vetting processes to make me feel safe about what they offer and a comprehensive platform to make the actual nuts and bolts really easy.
I definitely prefer to put my money in the hands of people who know how to make it work for me so I don’t recommend actually owning a farm without help, even if you know more than the average person. It’s complicated!
TL;DR – Farmland REIT
- A farmland REIT is a good way to get into farmland investing and hedge against inflation.
- The peace of mind that comes with farmland and not having to be involved in the management of the farms is great for many people.
- But the best REIT of all is the non-REIT, AcreTrader, it’s the best way to gain the benefits of farmland.