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If you are thinking about investing in farmland, one of the significant considerations is determining how long you should be prepared to hold the farm.
Generally speaking, investments in real estate, whether commercial, residential or farmland, are illiquid. Real estate investors should frequently be prepared to hold their investments for as many as 5 to 10 years.
Optimally, one would want to plan to hold an investment long enough to be in a position to recoup their acquisition price, operating costs (e.g., property taxes, insurance, repair and maintenance) and estimated exit costs (such as commissions, legal, accounting, title and other closing costs) through property cash flows and to benefit from appreciation in the value of the property over the hold period.
Holding Periods Can Differ By Farm Type
With farmland, the hold period may be influenced by the type of farm one owns or has invested in, such as row crop farms (soybeans, wheat, corn) or permanent crop farms (nuts, fruit trees).
Permanent crops are more capital intensive to establish and therefore an investor would likely need to hold a permanent crop farm for a longer period to recoup their initial investment cost.
A “yield focused” farm that is generating good cash flow from tenant rent might be held for a shorter period of time because it could be attractive to other investors due to its positive net annual cash flows.
With a “value-add” farm, where the investor contributes capital to improve the value of the farm, (e.g. new irrigation equipment, land leveling or installing a tile system for drainage), an investor potentially generates appreciation more quickly due to the improvements, which could result in higher rents and increase value per acre, thereby shortening the desired hold period.
Some investors may plan to hold their farmland for extended periods of 20 or more years. Others may have a multi-generational investment horizon for their farmland investment due to estate planning purposes.
Many investors look to relatively briefer hold periods that, while not short in duration as compared to traditional investments such as stocks, range from 5-10 years.
For example, investors who invest in farms through the AcreTrader platform could expect to see the following hold periods by type of farm:
Deciding On When To Sell A Farm
There are many factors that an investor may want to consider in deciding if the time is right to sell a farm.
These factors include:
Market conditions - are farmland values appreciating or decreasing in the area in which the farm is located? Is it a buyer’s or seller’s market?
Tax rates - has the farm been held long enough to qualify for long term capital gains tax treatment?
Loan Maturity - if debt was used to purchase the property and/or finance improvements, is the loan nearing maturity in a rising or falling interest rate environment?
Other Opportunities - can the money invested in farmland earn higher returns invested elsewhere?
Additional reasons - need for capital for different purposes, age of investor(s), tax rate of investor(s), estate planning goals, rising operation costs such as property tax increases
Other things that could be taken into account when making a decision to sell a farm are (i) the the age of any equipment affixed to the farm such as irrigation or tile systems and their remaining useful life; (ii) falling or rising tenant rental rates in the area; (iii) constraints on water supply; and (iv) possibly falling or rising commodity prices for the type of crops supported by the soil on the farm.
While the internal rate of return of farmland values have been appreciating over the past several years as, any of these factors, alone or combined, could generate fluctuations in the price per acre of farmland on a local level at a particular point in time.
Why Farmland and AcreTrader's Approach
Among real estate investments, farmland stands out as a unique asset class with some distinct advantages.
Stated simply, farmland investing has historically exhibited less volatility than the stock market and has generated a more predictable cash flow from tenant rental payments than other types of alternative investments.
While the value of gold or stock markets can go down over 40% or 50% in a single year, farmland returns have been positive every year since 1990 (the first year of the index).
Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. This data reflects the period 12/31/1990 - 12/31/2018.
At AcreTrader, the average estimated hold periods for our farm investments are 5-7 years, but as the farm Manager, we have an ability to look at local and regional market conditions in order to determine when the timing is optimal to try to sell a farm.
The decision to sell a farm is complex and influenced by many factors. Owning farmland can be challenging, but you can work with a land professional like AcreTrader to make the process easier.
If you’d like more information about buying or selling farmland, contact us here.
Note: The information above is not intended as investment advice. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.