For further insight into the differences between Farmland & Real Estate Investing, check out our previous article: A Quick Comparison: Farmland Vs Real Estate Investing.
Property can be one of the most dynamic investments around. Buying a home, commercial property, development land, or farmland all come with unique advantages. This is true not just for your investment portfolio, but also for the different growth opportunities they can create.
If you’re new to farmland investing, you might have questions about how it differs from real estate investing. After all, both incorporate an element of land ownership. The truth is that there are several similarities and differences, not only in the type of real estate you’re investing in, but also with regard to their strategic benefits.
Although farmland investing has been rising in popularity since the 1980s, this asset class may not be as familiar to most investors as real estate or other alternative investment types. When investing in farmland through platforms like FarmTogether, investors purchase a fraction of a farming property. This includes the land itself, farming equipment, and a portion of the proceeds made from crop sales.
Despite having a somewhat lower profile than other similar investment types, more and more attention has been turning to this asset due to farmland's track record of steady and stable appreciation. Farmland has either increased in value or stayed stable for decades. In 2020 alone, the average acre of farmland cost $3,160. The USDA forecasted a growth in farm income for 2020 as well, which bodes well for farmland investors looking to make returns in an otherwise volatile economy.
Farmland investing offers several advantages for investors, particularly when inflation is on the rise. Farms tend to benefit from inflation as the cost of their goods increases. This benefits investors who have farmland holdings in their portfolio, and can also serve as a hedge against the other challenges created by inflationary pressures on volatile markets.
Real estate investing gets plenty of attention from people who want to diversify their portfolio and hedge against market downturns. Home values in the United States have increased by just over 7 percent from where they were three years ago, and renters currently occupy around 44 million homes across the country. The relative stability of residential real estate, both in terms of value and demand, make this an alluring option for investors that want to seek opportunities outside the stock market.
Commercial real estate can be another option for investors, although the current impacts of COVID-19 have caused significant disruptions in the space. That being said, real estate itself can be somewhat fickle: the value of your real estate investment depends on where you plan to buy property, overall trends in rental rates, and demand for the kind of property you own.
When comparing farmland investing versus real estate investing, there are several similarities to bear in mind. Both involve ownership of real property—be it as a sole investor (outright ownership of an entire property or farm) or as a partial investor who owns shares of a piece of property along with others.
There are several means by which you can become a partial investor in either farmland or real estate, whether it be through a real estate investment trust (REIT) or crowdfunding platform that enables fractional ownership.
Buying your own investment property differs significantly from fractional ownership through a third party. Chief among these differences is the amount of return you stand to get versus the amount of work you need to put into maintenance and management. Doing it alone as a solo investor entitles you to a greater share of the profits, but may also require more work on your part. Investing through a group gives you a smaller share of profits that’s based on how much money you’ve put in, but also means that the group managing the investment takes on more of the day-to-day needs of the property.
There are also significant differences between REITs and farmland investing, which we’ll dive into next.
There may be some overlap between farmland investing and real estate investing, but there are a significant number of differences between them as well. One of the major differences is value and stability. Real estate tends to fluctuate more than farmland: the 2006 housing bubble’s collapse resulted in a steep loss in real estate value throughout much of the United States. The current economic uncertainty due to the COVID-19 pandemic has led to a surge in unemployment, which may lead to less stability in the housing market yet again.
Farmland, on the other hand, has had remarkable resilience in terms of value throughout the past three decades. On average, farmland has either maintained or increased in value, irrespective of major and minor economic fluctuations that have had major impacts on commercial and residential real estate, as well as financial markets more broadly speaking.
Another major point of differentiation between real estate investing and farmland investing comes down to income sources. REITs can make money off of rental, leasing, and property sale; alternatively, farmland investing can generate revenue from all these sources as well as the cost of goods sold at market as well. In other words, investors get a stake in the money made from crop sales on top of the other revenue sources, which can create additional value.
There are plenty of reasons why you might want to incorporate real estate into your portfolio—either as a major part of your investment strategy or as part of a diversified set of assets. There are plenty of different opportunities when it comes to what sort of real estate investment you want to pursue, however.
With farmland investing, you can get the exposure to real estate that you want alongside other sectors. This makes farmland investing a great choice for investors who want to make their dollar go as far as possible, priming themselves for the highest return possible from several revenue streams. FarmTogether makes it easier than ever before to invest in farmland.
FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.