If you’re looking for a different kind of real estate investment, consider farmland. Farmland is a critical component of Canada’s agriculture industry. More importantly, for investors, it’s a relatively stable, tangible asset. Many investors don’t consider farmland because it can be complicated if you aren’t familiar with the industry; however, it is worth considering for a great long-term investment.
Table of Contents - Investing in Farmland
A look at farmland in Canada
Canada is one of the world’s largest agricultural producers. Agriculture only accounts for four percent of Canada’s labour force, but that four percent is vital. Canada’s crops feed people here and abroad, and agricultural outputs supply many different industries.
Because of this, farmland in Canada is an important resource. Less than one-twelfth of Canada’s land is suitable for farming. Most of that land is found in Canada’s prairies in Alberta, Saskatchewan and Manitoba. According to Farm Credit Canada (FCC), farmland values increased in 10 of 12 provinces from 2017 to 2018. Alberta and Saskatchewan both saw their farmland values increase by 7.4 percent, while values in Quebec rose by 8.3 percent.
Why invest in farmland?
Farmland is a great way to diversify your portfolio and protect yourself from losses. Unlike other traditional asset classes like stocks and bonds, it has a positive correlation with inflation. Farmland remains more stable than other real estate investments during periods of economic instability.
You have many options for how you earn cash from your farmland investment. Row crop farmland usually produces 4 to 8 percent returns in cash income. You can earn income through rents charged to farmers or sharecroppers to use the land, or charge for other land uses like hunting space and billboard rental. You can also rent the land out to energy companies for wind power.
One of the top benefits of investing in farmland is capital appreciation. Farmland is increasing in value as demand for agricultural products grows and available land declines. Even as markets fluctuate, there is always intrinsic value in owning land.
Investing in farmland also helps Canada’s farmers. Small farm operations are like small businesses, including your investing venture. Farmers are entrepreneurs who need access to land and capital to (literally) grow their business. By investing in farmland you’re able to help farmers expand operations in a way that’s flexible and lightweight for them.
Investors might worry that if the crops don’t perform well you won’t get a return on your investment. As the landowner, you only require that your tenant pay his or her rent. As in commercial real estate, a poor harvest may mean that the farmer has a harder time paying you, may need to end the lease or that you are unable to find a new tenant. You do not bear the risks for operating the farm, so your returns aren’t directly related to how well your tenant’s business is doing.
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Add a farmland expert to your team
More investors aren’t investing in farmland because it has a high barrier to entry. The market is fragmented and constrained to certain areas. You need specialized knowledge about the region and the industry to be successful.
If you’re new to investing in farmland, you’ll find it’s quite different than getting started in residential real estate. You’ll need to know about the agricultural industry, the market for crops and the land to make a sound investment decision. If this is unfamiliar to you, find a professional who can shepherd you through the process.
One of the most common risks when investing in farmland is overpaying for the land. If you buy land without understanding the area lease rates and what drives those rates, you won’t see great returns. Fortunately, real estate companies are specializing in selling rural land and farmland. A real estate professional from one of these firms will be an expert on your team, keeping you informed about Canadian agriculture, farmland investing and finance.
Another way you can get involved in farmland investing is with a private equity firm specializing in farm partnerships. Through these funds, you can invest in equity partnerships with Canadian farmers and farmland without having to manage the land directly.
Before you invest in farmland
Because a farmland investment is different than other types of real estate investments, you need to prepare for the purchase differently. Working with experienced farmland professionals will supply you with the information you need, but there are a few more points you should consider before getting started.
As with any real estate purchase, you need to know how much land you can afford. Unlike other purchases, your usual lender may not understand your investment. Your lender may create your loan based on a model that doesn’t consider the intricacies involved in farmland investing. Just as you found a farmland professional to guide you through the buying process, you’ll also need a lender who understands farmland investments. Ask your land professional for recommendations for lenders.
Investing in farmland is a long-term commitment. You will spend more time with this investment than you might with other properties to get the most return on your investment. The farm economy fluctuates over time, so you’ll want to hang onto your investment for several years to fully understand its potential. Be prepared to hold your farmland for a minimum of five years, if not 10.
Because you’re holding on to the property for so long, and it’s such a stable piece of your portfolio, you may find yourself quite attached to your property. It not only provides you with a source of income, but it also helps a farmer achieve his or her business goals. When it the time is right to divest, you’ll need to put these emotions aside and do what’s best for your business. Again, a land professional can help you navigate the selling process as with the buying process.
If you’re looking for a long-term, stable investment that lets you try something different, consider investing in farmland. With good research and the right team, you can find investing success with farmland.
Should You Invest in Farmland?
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