Is Farmland Investment Property?
Farmland, if properly managed, can produce an excellent stream of cash flow to the investor by leasing the land to local farmers. Farmland can be divided into two types of properties: permanent crop and row crop. Permanent crops grow on trees or vines, and constitute land that is somewhat inflexible. Row crops are commodities like soybeans and vegetables. Farmland with row crops are more flexible, which reduces risk and protects the value of the land. Most investments in farmland are in established properties.
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Types of Farm Leases
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Farmland is typically leased to local farmers who need additional land to grow crops. One type of lease requires the cash rents of the farmland to be paid in advance of the growing season. In this scenario, the owner is not subject to the success or failure of the crops. A variable lease is based on the value of the crops and divides the risk between the operator and owner. The third type is a hybrid lease, which contains a fixed payment plus a percentage of the value of the crops.
Farmland Investment Profile
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Investing in farmland is a bit different than buying stocks, bonds or even a hedge fund. Farmland lacks the liquidity of stocks, and all transactions are handled privately instead of on an exchange. Finding reliable appraisals and comparison sales is difficult, especially in unfamiliar areas. Some properties that are put up for sale may sit on the market for years. In addition to the dollar cost per acre, other costs include real estate broker commissions, legal fees, and in many locales, transfer taxes.
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Due Diligence
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The due diligence of farmland needs to include a review of the location, soil, water supply, number and quality of renters and available labor. After some preliminary inspections and tests, the risk lies in labor. Visa regulations and legal ramifications of below-market wages can impact costs and create unwanted bad publicity. On the other hand, tax advantages for this type of investment can be useful for increasing an after-tax cash stream and overall return.
Farmland as an Investment
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When properly researched, farmland can serve as an attractive investment alternative. Current cash flow, along with the potential for long-term gains, are the main traits of any successful investment. Farmland also serves as an inflation hedge. As incomes from developing countries increase, food consumption will also rise. Higher food consumption raises the demand for agricultural products. The supply of farmland is also a consideration. The availability of tillable farmland has decreased, and it's doubtful that much, if any, will revert to farmland status.
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