Real estate investment trusts (REITs) have become increasingly popular among investors who want to enter the real estate market without the need to purchase a property. Farmland, in particular, has seen a steady increase in value over the past decade, making it an attractive investment option. In this article, we will delve into the most promising farmland REITs and explore alternative ways to invest in this lucrative market.
Understanding REITs
Real estate investment trusts are vehicles that allow investors to gain exposure to the real estate market without directly owning a property. These trusts typically acquire and manage various types of real estate assets, including residential buildings, commercial properties, and farmland. To be classified as a REIT, the entity must invest at least 75% of its assets in real estate properties and distribute at least 90% of its net income to shareholders in the form of dividends.
There are two common types of farmland REITs:
Equity REITs
Equity REITs acquire properties and generate income through rental payments and other forms of income derived from the asset. Investors receive dividends based on the performance of the properties owned by the REIT. Farmland REITs under this category acquire farms and lease them to operators who utilize the land for agricultural purposes.
Debt REITs
Debt REITs specialize in providing financing for real estate developers and operators. These trusts can offer loans to farmland operators for property development or businesses looking to acquire farmland for commercial purposes. Investors in debt REITs earn income through interest payments and other fees.
Best Farmland REITs
Farmland REITs trade similarly to stocks and are listed on exchanges such as the Nasdaq or the New York Stock Exchange. Two notable farmland REITs worth considering are:
1. Gladstone Land (LAND)
Gladstone Land Corp is a company that invests in farmland by acquiring properties and leasing them to farmers. With a portfolio of 169 farms spanning 115,000 acres across 15 states in the US, Gladstone Land ensures all its farms are fully productive. The fair value of its properties stands at around $1.5 billion. Investors can gain exposure to Gladstone's business by purchasing shares of the REIT, listed as LAND on the Nasdaq. Over the past decade, LAND has delivered total gains of 134.6%, with a dividend yield of 2.4%.
What sets Gladstone Land apart is its tailored approach to working with farmers. The trust offers various arrangements, including buying land, leasing to experienced farmers, or purchasing land from those who lack the resources or expertise. This diversified business model enhances revenue generation and stability.
Gladstone Land is an excellent choice for investors seeking exposure to various farmland dealings. The monthly dividend payments make it an appealing option for those who rely on regular income.
2. Farmland Partners (FPI)
Farmland Partners engages in all aspects of farmland investing, from acquiring and leasing properties to managing their own farms. With a portfolio encompassing 185,000 acres across 18 states in the US, Farmland Partners boasts an impressive occupancy rate of 100% and a gross book value of approximately $1.1 billion. Shares of the REIT are listed as FPI on the New York Stock Exchange.
What makes Farmland Partners unique is its diverse revenue stream. In addition to traditional leasing activities, the trust generates income through auctioning, brokerage, and providing financing. This diversified approach mitigates risk and adds stability to the trust's revenue generation.
Farmland Partners is an ideal choice for investors who want direct exposure to farmland investments. Investors can benefit from its focused approach and portfolio diversity.
Alternatives to Farmland REITs
Besides investing in farmland REITs, there are other platforms that offer investment opportunities for both accredited and non-accredited investors. These platforms facilitate farmland investment, making it accessible to retail investors. Here are two prominent alternatives:
1. AcreTrader
AcreTrader is a farmland investing platform that pools funds from a group of investors to purchase farms. Investors own a fraction of the farmland based on their share ownership. Returns are generated through rental income and potential appreciation of the property value. The platform meticulously screens each property to ensure investment-grade quality. AcreTrader's opportunities are currently available to accredited investors, with a minimum investment ranging from $15,000 to $40,000.
2. FarmTogether
FarmTogether offers a multifaceted approach to farmland investing. Participants can purchase fractional ownership of properties or invest in the firm's funds. Minimum investments for crowdfunded offerings start at $15,000, with holding periods typically ranging from five to 12 years. The platform also offers the Sustainable Farmland Fund, targeting annualized returns of 8% to 10%. The minimum investment for this product ranges from $100,000 to $5,000,000. FarmTogether also facilitates direct purchases and 1031 Exchanges.
Investing through platforms like AcreTrader and FarmTogether provides investors with unique opportunities to participate in farmland projects.
Taxation and Farmland REITs
The tax treatment of income earned from farmland REITs varies. Dividends distributed by REITs are typically taxed as ordinary income at the individual level. However, REITs themselves are exempt from corporate taxes. Capital gains from changes in share or property values are taxed as short-term or long-term capital gains based on the holding period.
Advantages of Farmland REITs
Farmland REITs offer several advantages for investors:
- They provide exposure to the real estate market without the need to purchase a property outright.
- Trading REITs has become more accessible with zero trading fees offered by most brokerage firms.
- REITs can provide both fixed income through dividends and potential wealth creation through capital gains.
- Farmland has shown consistent appreciation in value over time.
- Investing in REITs is quick and easily accessible through electronic trading platforms.
- Farmland REITs can act as a hedge against inflation due to the correlation between crop prices and land value.
- REITs tend to be less volatile compared to individual stocks, as their value is backed by physical assets.
Disadvantages of Farmland REITs
While farmland REITs offer many advantages, there are a few factors to consider:
- The two farmland REITs mentioned in this article have underperformed the S&P 500 index in the past decade.
- Dividends from REITs are taxed as ordinary income.
- REITs may perform poorly during times of macroeconomic instability, particularly if interest rates are rising.
Choosing the Best Farmland REIT
When selecting a farmland REIT, consider the following key factors:
- Quality of the properties: Assess the revenue-generating capacity and demand for the properties in the trust's portfolio.
- Occupancy rates: Look for REITs with high occupancy rates, ideally above 95%, to maximize returns on invested assets.
- Business model: Consider REITs with diverse revenue streams to cushion potential income fluctuations.
- Dividend yield: Higher dividend yields are generally more desirable, but thoroughly analyze the reasons behind above-average yields.
- Historical performance: Evaluate the REIT's historical performance, keeping in mind that farmland returns differ from equity indexes.
- Management's track record: Consider the experience and expertise of the REIT's management team.
FAQs About Farmland REITs
Here are answers to some frequently asked questions about farmland REITs:
Q: How are dividends from farmland REITs taxed? A: Dividends from farmland REITs are generally taxed as ordinary income at the individual level.
Q: How do farmland REITs perform compared to the S&P 500 index? A: The two farmland REITs mentioned in this article have underperformed the S&P 500 index over the past decade. However, it's important to remember that farmland is an alternative asset class with different return characteristics.
Final Thoughts
Investing in farmland REITs offers exceptional opportunities to gain exposure to the thriving real estate market. With companies like Gladstone Land and Farmland Partners listed on public exchanges, investing in farmland has become more accessible than ever. Additionally, platforms like AcreTrader and FarmTogether provide alternative avenues for retail investors to participate in the farmland market. Consider the pros, cons, and key factors when selecting the best farmland REIT or investment platform that aligns with your investment goals and risk appetite.