4 Farmland Investment Strategies
Mark Twain once quipped, “Buy land, they’re not making it anymore.” Investors are hot into the farmland market that offers a low risk investment and promises a potential high reward. The average age of the farmer is 58 years old and as they age out, farmland will become available for investors to cash in on. We’ve put together 4 farmland investment strategies being practiced in today’s market.
Similar to the popular, “flipping houses” practice, investors can buy land at a low price and make minor improvements to sell at a higher price. Minor improvements could include, buying main road access if available, clearing trees or timber, removing fencing, building outbuildings, improving for hunting potential, building ponds for fishing or building a cabin.
For example: An investor can purchase a 100 acre piece of land with no direct access to a road and also has 15 acres of tillable land with 85 acres remaining in recreational/timber land. The investor was able to buy at auction for $4,000 per acre, an initial investment of $400,000. The buyer decides he’s going to turn it into a hunting property and hires to have food plots put in on the 15 tillable acres for $3,000. To add to the draw, the buyer also decides he’s going to put a hunting cabin in the timber and add a lane for $65,000. After all the work is done, the property sits on the market for 10 months and is sold to another buyer for $5,500 per acre with a final selling price of $550,000. The initial investor was able to make a profit of $82,000 in a fairly short amount of time.
Successfully subdividing land can have many benefits providing flexibility and increased profits to the landowner. Subdividing may be desirable for land that is on the outskirts of town where development could be possible. It also may be beneficial if a parcel has an acreage on it, where the landowner could divide the land so that the acreage is separate from the farmland that surrounds it.
For example, a parcel of land with 96 tillable acres and a 4 acre acreage comes up for sale. The current landowner decides to subdivide the land and sell it at auction as a multi-parcel option. The landowner splits the 96 tillable acres into 2 parcels at 48 acres each, and also has the 4 acre property which results in 3 tracts of land.
An investor decides she’d like to buy (1) 48 acre parcel that sits on the edge of an expanding city and further subdivides the parcels down into (12) 4 acre lots that she turns around and sells for a higher price per acre to developers interested in building homes on each of the newly subdivided lots. The investor can make a pretty quick return on investment just by subdividing land and selling at a higher price than what she paid. Not only did the investor have a high return on investment, but the original landowner did as well. Since the landowner subdivided the land, they attracted a larger pool of buyers, resulting in a larger return on investment.
Someone who is interested in investing in farmland can focus on transitioning the land into residential, commercial or industrial uses. Buyers for transitional land are typically motivated by the price and the hold time.
For example, if a buyer is able to buy a 20 acre piece of land close to an urban development for a fair to low price and construct a strip mall or shopping center within an 12 month period, that’s a fairly quick turnaround for the return on investment to start rolling in and is highly motivating for the buyer. However, if the buyer purchases the 20 acres for a high price, invests in a strip mall and has to wait 2 to 3 years for the return on investment to roll in, he won’t be nearly as motivated to purchase the land.
This is also somewhat of a risky investment because of the amount of hold time that can happen without making any improvements to the land before developing. Holding costs without a cash flow gets expensive. It’s imperative to the buyer to purchase the land and invest in the development at the low price period of the land to help deter the holding cost.
Investors also need to be aware of the back-end legalities when it comes to developing the land. Zoning ordinances can make or break a transitional land plan when buyers are unable to redirect the zone from an agricultural zone to a residential or commercial.
Buy and Hold Farmland
To buy and hold farmland is about as simple as it gets when it comes to farmland investment strategies in the land sector. An investor will purchase the farmland either from auction, private sale or a buy/leaseback sale and lease the land to a tenant. Depending on the type of land, the tenant could either farm it, hunt on it or use it for another recreational use. While this type of investment is long term and has a slow return on investment, it is one of the less risky options out there.
The landowner could also lease on sharecropping agreement, which allows the tenant to use the land and literally share the crop profit. Sharecropping spreads the risk of the farming operation between the tenant and landowner in the event of a bad year. This also pushes the tenant to work hard to ensure a large crop and to care for the land, because the profits are being shared.
Mark Twain was right when he said they weren’t making farmland anymore, but with a variety of farmland investment options, interested investors can make the most out of the land available and choose an option that fits their goals and interests.
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Topics: land investment