Should U.S. Investors Take Their Rural Investing Cues from Abroad?
Farmland: Any land used for farming.
Rural: The United States Department of Agriculture (USDA) defines rural areas as those that are nonmetropolitan and have “open countryside, rural towns (places with fewer than 2,500 people) and urban areas with populations ranging from 2,500 to 49,999.”
Over the past decade, international investors have doubled down on a certain type of real estate. In fact, they have purchased so much of this particular type of land just since 2004 that cross-border ownership in this sector accounts for an area roughly the size of the state of Tennessee. Given what foreign capital infusions can do for local real estate markets, it is surprising that this trend is flying so far under the radar. Likely, this “oversight” is due to a national focus on residential and commercial real estate to the exclusion, in large part, of rural real estate and farmland.
Farmland, specifically, has been a target for acquisition for foreign investors since about 2004. According to USDA data, between 2004 and 2014 (the latest date available), the amount of agricultural land held by foreign investors nearly doubled, rising from 13.7 million acres to 27.3 million acres. During that same period of time, farmland values have also roughly doubled, rising from below $1,500 per acre to hover around $3,000 per acre.
While this upward trend has been punctuated by something the USDA refers to as “periods of imbalance” and real estate investors are more likely to refer to as “depreciation,” the overall resilience of the real estate facet of the U.S. farming industry shines through. Interestingly, farmland-sector income does not necessarily follow farmland values.
When Farmers Lease and Investors Own
According to 2017 data from the USDA, about one third of all American farmland is presently owned by “non-operators,” meaning that the entities that own the farmland lease it out to farmers rather than cultivating crops themselves. Many of these non-operators are presently international interests who have purchased the land for the leasing income, not farming revenues. This affects farmers in a number of ways, certainly not all positive, but certainly represents a very intriguing situation for real estate investors.
As an increasing portion of the farming population becomes accustomed to leasing farmland instead of owning it and the investing sector becomes more comfortable with the concept of farmland investing, the value of farmland specifically as a real estate investment as opposed to a business operation is likely to climb more quickly (and fall more quickly) than it has in the past.
In short, farmland could begin behaving more like residential real estate. That will inherently make farmland investing more attractive to investors who have previously avoided it as unfamiliar or overlooked it entirely. It also could undermine the inherent resilience that has made the sector, as New Food Economy reporter and podcast host Katy Keiffer described it recently, an asset class that “outperformed most [U.S.] asset classes for the previous 20 years.”
Keiffer went on to say in the article that the farmland sector is still rife with opportunity for a “well-heeled investor” because many operators who do own their own land, farmers, are nearing retirement age. In fact, she noted that the relatively high median age of American farmers, about 55 years, will quite possibly lead to roughly 92 million acres of farmland changing hands in the next five years, “with much of it passing to investors rather than traditional farmers.”
Buying Farmland in 2017
While all of this makes owning farmland sound appealing and very nearly turnkey, the reality of owning farmland even as a non-operator is very different than an investor with experience only in residential real estate might expect. Farmland is very big, very expensive, and very complicated to value accurately.
Not surprisingly, these complications make it difficult for the uninitiated to obtain financing or even to do effective due diligence. Lenders have different and often highly individualized rules for making loans on farmland. While some may base the decision strictly on cash flow, most also factor in likely appreciation of the land and, interestingly, how the federal government might view the loan origination. Because the USDA has many programs designed to assist farmers and farmland owners, the eligibility of a specific piece of farmland property and the operations on it for these programs can affect a lender’s decision to offer or deny financing.
Your future plans or the plans of the operator will also play a role. For example, even if a piece of land is not currently being used for lumber, if there is marketable timber on the land then a lender might offer you financing contingent on your cultivating that product or selling some of it off to alleviate purchase costs.
If you do opt to invest in farmland, remember that as with all large real estate deals, you do not have to go it alone. Invest in education on the topic, explore local, state, and federal resources, and, as always, evaluate the market in light of your entry and exit strategies. The face of farmland ownership is changing, and periods of change are often windows of opportunity for prepared, savvy real estate investors.