In the ever-changing world of investments, where unpredictability and market fluctuations reign, one asset class has emerged as a stable haven for investors seeking diversification and a hedge against inflation: farmland. Traditionally seen as a complex arena for new investors, farmland has now become more accessible, thanks to innovative solutions like farmland crowdfunding and the rise of low-cost investment options such as Farmland Real Estate Investment Trusts (REITs).
In this article, we will delve into the advantages of farmland REITs and highlight two of the best options available in the market today.
Understanding Farmland REITs
A Real Estate Investment Trust (REIT) is a company designed to hold real estate. In the case of farmland REITs, the focus is on agricultural land. Investors pool their capital, which is then used to acquire various parcels of farmland. Farmers then lease the land from the REIT, generating periodic dividends for the investors. This structure allows investors to benefit from the stability of farmland returns without the responsibilities of owning and managing a farm.
Debt vs. Equity REITs
Farmland REITs can be categorized as equity REITs and debt REITs. Equity REITs involve the purchase of farmland for leasing to farmers, while debt REITs provide loans to farmers for expanding their operations or acquiring more land. While equity REITs tend to be more volatile, they also offer higher potential returns.
Taxation of Farmland REITs
Farmland REITs enjoy special tax treatment, provided they adhere to specific guidelines regarding income distribution to investors. Unlike corporations, these trusts can pass income to investors pre-tax. However, investors receiving dividends are taxed as ordinary income, which is different from stock dividends that may be treated as capital gains.
Best Farmland REITs to Consider
While the options for farmland REITs are somewhat limited, two prominent players stand out in the market:
1. Gladstone Land Corporation (LAND)
Founded in 1997, Gladstone Land Corporation was the first farmland REIT to enter the scene. With 131 farms across the U.S., totaling nearly 113,000 acres in 14 different states, Gladstone follows an equity REIT model. The company generates income by purchasing farmland and renting it out to farmers. Gladstone Land pays monthly dividends to investors, providing a consistent income stream.
2. Farmland Partners (FPI)
Farmland Partners is a larger player in the farmland REIT space. Established in 2014, the company owns over 160,000 acres of land across 17 states. FPI focuses on both commodity crops and specialty crops, providing investors with exposure to diverse agricultural sectors. The REIT aims to work with farmers to enhance their farms' profitability, ultimately benefiting both farmers and shareholders. Farmland Partners pays dividends quarterly, adding a regular income stream for investors.
Advantages of Investing in Farmland REITs
Investing in farmland REITs offers several advantages:
- Portfolio Diversification: Farmland provides uncorrelated returns compared to traditional asset classes, reducing overall portfolio volatility.
- Inflation Hedge: Farmland has historically served as an effective hedge against inflation, offering stability during economic uncertainties.
- Attractive Total Returns: Farmland REITs provide investors with both rental income and capital appreciation, delivering a combined average annual return of 11% from 1992 to 2021.
Risks of Investing in Farmland REITs
Despite the advantages, investing in farmland REITs comes with risks:
- Interest Rate Risk: Farmland REITs, like other REITs, are exposed to interest rate risk, which can impact their borrowing costs and ability to make acquisitions.
- Natural Disasters and Crop Prices: Farms are vulnerable to natural disasters, which can affect harvests and rent payments. Additionally, crop prices, especially for commodity crops, can be volatile, impacting farm income.
- Farmer-Tenants: Challenges in the farming business, such as natural disasters, equipment costs, and debt, may lead to financial difficulties for farmer-tenants, which can affect rental payments.
In Conclusion
Farmland REITs offer a unique avenue for investors to access the stability and potential returns of farmland without the complexities of direct ownership. Gladstone Land Corporation and Farmland Partners stand out as promising options in this niche market. As with any investment, thorough research and careful consideration of risks are crucial. So, if you're considering diversifying your investment portfolio, farmland REITs could be a wise choice for you.
