Income Producing Real Assets
The demand for income producing real assets has risen substantially in recent years, and it will continue to rise as investors gain a greater understanding of the asset class's benefits within their portfolio. There are plenty of advantages to income producing real assets: diversification, inflation hedging, and competitive total return potential are but a few.
...But that’s only part of the story. Here’s what you need to know about incorporating real assets that can produce income into your portfolio, why you may want to, and how to do it.
What are Income Producing Real Assets?
Real assets, in general, are tangible goods that you can own or invest in. Not all of them create recurring income, however. Those that do offer a value proposition that goes beyond the hedging, long-term investment role that real assets play in your overall portfolio.
When you incorporate real assets into your portfolio, you’re introducing holdings with a low correlation to other types of assets. In this case, a low correlation between assets means they have less of an effect on one another. For example, if the S&P 500 were to drop, farmland value wouldn’t necessarily follow suit. Farmland’s value is determined by other factors; therefore, it’s less in danger of losing value if the stock market does.
All asset classes have different levels of correlation with one another; some are high at 1.00, while others are lower (or even negative, such as the case of farmland with most other asset classes).
Here’s a breakdown of income producing real assets and why they’re an essential part of your portfolio.
Real estate is a perennial staple for almost every investor. If you own a home, condo, office building, or even an empty lot, you’ve got real estate in your portfolio. Land will always have worth, unlike stocks or equities that can go belly-up and lose their value.
The value and volatility of your real estate investment depend on the kind of land you own, however. This makes it critical to know exactly what you’re in for when you look at real estate investment opportunities.
For example, commercial real estate value was on the rise generally speaking—until COVID-19, that is. That’s caused some uncertainty in the commercial real estate market as it’s unclear what kind of demand there will be for office space. Residential real estate, however, has reversed the trend of lower annual growth—mostly due to the increased interest in suburban housing markets. Farmland value has, by comparison, stayed steady.
Real estate tends to appreciate in value over time, so even minor blips here and there don’t reflect the broader upward trends across each individual sector of the real estate market.
Global private debt fundraising (where direct lending constitutes the greatest amount of capital) decreased by 6.7% to $124.4 billion in 2020, according to data from Preqin and McKinsey. Private debt fundraising in North America, on the other hand, defied global trends, rising 15.8% year on year to $79.8 billion last year.
Direct lending has become an attractive, approachable option for investors who are looking beyond the markets for returns that most stocks, funds, and bonds can’t provide. This option enables you to generate income by way of the interest on recurring monthly payments.This is different from investing in a business since you’re not taking an equity position in the company. Most investors have been locked out of the direct lending space because this tends to be the domain of institutional investment firms, although this has begun to change.
There are a rising number of platforms designed to help individuals loan money collectively, especially as few investors have enough money to loan large sums. These platforms let you invest a certain amount of money that they then distribute to borrowers. With these options, you do not have to go through the legwork of finding someone to loan to, set an interest rate, or agree on loan terms. This work is all done on your behalf, which leaves you to reap the dividends.
Private investing is another option to consider if you want to take an equity position in a private company. When you invest privately, you’re operating outside the stock market, which means you’re not buying and trading shares as you would with a public company. Instead, you’re handing your investing dollars over to the individual company or, in most cases, a private equity firm. Either you or the firm then determine a valuation for the company, invest, and receive a dividend.
The world of private investing used to be much more exclusive than it is today. Rather than having to play with massive sums of money as a sole investor or private equity investor, you can opt to invest in private companies through apps. Many of these apps use fractional ownership to enable a wider array of investors to participate, since this model means individuals can put less money into their position.
Farmland investing deserves special mention outside of real estate, as far as real assets and income are concerned. Both commercial and residential real estate fluctuate significantly, and the last decade is no exception. These two sectors of the broader real estate market depend on market demand, which in turn is influenced by things like inflation and stock market swings. In other words, stocks and the value of a dollar can dictate whether one’s residential or commercial real estate investment generates a decent return.
Farmland, on the other hand, enjoys a low correlation with both the stock market as well as inflation. When the purchasing power of the dollar drops, the value of crops and the farmland they’re grown on increases. When stock markets take a dip, investors often rush to commodities as a hedge against volatility. Since farmland is responsible for generating much of what’s on the commodities market, it too encourages farmland value to increase.
Depending on how you decide to invest in farmland, this real asset can produce real income for you as well. FarmTogether’s platform generates returns for participants based on the performance of each farm it’s partnered with. This means you get to include real assets into your portfolio while also generating passive income.
Why Income Producing Real Assets Matter
Real assets stand up over the long term. They are typically more resistant to market fluctuations than other kinds of assets, because their value is often determined through other means. For example, a piece of land maintains its value as long as there is demand for it. If this land happens to be in Manhattan, there’s a significant amount of value associated with it.
The same is true of farmland as well. The number of farms dropped from 2,109,303 in 2012 to 2,042,220 in 2017. Farmland decreased from 914,527,657 acres in 2012 to 900,217,576 acres in 2017. This means that, in most cases, the value of farmland either stays stable or may even gain over time.
That’s just how the chart plays out for farmland value per acre as well. Since the mid-1980s, farmland has overall increased in value.
Source: USDA ERS
Real assets such as farmland can provide an opportunity to invest in a tangible asset that delivers real value for your portfolio. Better yet, farmland can generate passive income, depending on performance and the structure of your investment. When you invest in farmland through FarmTogether, you’re eligible to generate steady income while you maintain your position in one of our many investment opportunities.
How to Incorporate Income Producing Assets into Your Portfolio
There are several ways to incorporate income producing assets into your portfolio. Real estate is one of the go-to options, particularly when you’re able to rent your property or land. This can generate reliable income every month you have a tenant, which makes it a fairly straightforward way of producing income from your long-term investment.
Platforms that help you invest in early stage companies and startups also provide you with easy ways to incorporate income producing holdings into your asset mix. Investment companies that focus on real assets can be a great way to enter this sector of the market without having to get in over your head. Their investing professionals identify opportunities and present them in ways that are easy to understand. Thus, many investors opt for this route when they want income producing real assets.
Farmland investing is no exception. With FarmTogether, you can unlock the portfolio-boosting benefits of farmland investing without having to become an industry expert. Our seasoned team of investing professionals select the best farmland opportunities from across the country. All you need to do to get started is make a $15,000 initial investment. From there, we’ll pair you with a member of our team that can help you realize your investing goals.
Disclaimer: 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.