To create a strong portfolio, diversification and investment in new asset classes is vital to growth.
While the stock market teeters and other asset classes are hit by market volatility and instability, some are thriving. In fact, some asset classes take global crises head on. They find ways to increase value and become even more relevant than they were previously.
Farmland is one of those investment opportunities.
For the uninitiated, farmland can seem like an odd, if not impossible asset class to obtain. Many are likely to assume that farmland investment is just like any other real estate endeavor, and isn’t diverse enough to constitute its own asset class.
While farmland is technically, well, land, opportunities for return, growth, and its outstanding stability in times of crisis and hyperinflation make it one of the most important assets you’ll come across.
Farmland is becoming a must-have investment, not an alternative.
Strong Returns From Various Income Sources
Like standard real estate investments, farmland generates returns as the value of the land increases over time. However, unlike traditional real estate, farmland investments have the added benefit of accruing seasonal income through crop yields, lease payments, land rentals, and other types of resource extraction.
Crop yields vary from season to season. If the yields are high, investors can expect a higher return on their investment in a given year. Any extra income from crop yields is an added benefit on top of the core investment: the land itself. Returns will vary on the type of crop being farmed, how long the seasons are, and are subject to weather conditions.
Lease payments can accrue if the investor rents the land out to farmers to use. These farmers will plant whatever crops they want, and will pay investors in order to use the land. These payments don’t vary between seasons, and aren’t subject to low or high yield seasons.
However, land rentals can take many forms. Some advertisers use farmland to erect billboards, paying the owner of the land to do so. Even more interesting, many clean energy companies use farmland as a way to extract resources such as wind and solar energy. The land is similarly leased for these projects, and could possibly include extra revenue depending on the amount of resources extracted in a given year.
Historical Growth of Farmland
If you haven’t heard, farmland prices are booming. According to Jason Henderson of the Federal Reserve Bank of Kansas City:
“Lean supplies, strong export activity, and vibrant demand both at home and abroad have pushed crop prices to record highs, offsetting today’s spiraling production costs. As a result, farm profits and investments have soared, and farmland values have boomed.”
But, you may be asking, what do we mean by “boom?”
The chart from the USDA, National Agricultural Statistics Service shows that between the market crash of 1987 to 2019, farmland prices have grown dramatically across the United States. Plus, projections show that these rates aren’t going down anytime soon.
There’s a lot of nitty gritty in the debate around what will continue to drive this boom, but ultimately it boils down to one thing: people need to eat.
Rising domestic and global populations need to be fed. Increasing yields garnered from existing plots of land, combined with the rising value of the land itself, is a growth opportunity on an already valuable and stable investment.
Stability in An Age Old Asset Class
The steady increase of the value of farmland has made it a staple of stable investment for decades. In observations of recent economic downturns and recessions, including the 2008 financial crisis, farmland has been shown to have a “negative correlation” with macroeconomic factors.
While farmland, as with every other investment, can’t exactly be defined as “recession proof,” it has been known to bounce back at a more rapid rate, and has been shown to perform better coming out of an economic downturn than many other “stable” investments such as gold.
As Todd Keuthe et al. have noted, “The years following the 2008 financial crisis have been marked by general economic malaise, yet the period has been relatively prosperous for the agricultural sector.”
Overall, alternative investing, especially in farmland, is a perfect way to diversify your investment portfolio. What many don’t know is that you can even invest using a Self Directed IRA or Solo 401k.
Plant Retirement Fund Seeds into Farmland
Investors have added alternative assets to their retirement portfolios since the late 1980’s; Initially, for example, tangible assets like real estate were popular. Since then,hard assets have become more mainstream and have a valuable place in retirement portfolios. This is because they provide yield (rents or crop returns), and the underlying asset value continues to increase. Let’s dive deeper into farmland specifically.
Did you know that with a self-directed Solo 401k plan, or Checkbook IRA, you can use your retirement funds to invest in farmland? If you didn’t: you can. And it allows you to capture unique growth opportunities.
An added benefit, when you invest in farmland with retirement funds, the gains are tax-deferred, or tax-free. This means you can increase your return on investment exponentially.
Lastly, farmland can provide some protection against inflation. In an era when money printing seems to run rampant, this is critical. If your money isn’t growing, you’re losing. Therefore, you need to stay ahead of inflation with a solid return and an asset that retains its value. Farmland does just that.
Reap More Rewards with Nabers Group
The Solo 401k by Nabers Group allows you full checkbook control: You decide where and how your retirement funds are invested. When you find a deal that’s worth investing in, there are no delays on execution. You control the checkbook, so you can simply wire the funds from your Solo 401k bank account right to the investment organizer. Your Solo 401k then owns the asset, in this case, a piece of farmland.
Interested in learning more about how you can invest your Solo 401k in farmland? Click here to contact the FarmTogether team, leaders in farmland deals compatible with your retirement account.