Farm Land Investment

[dmnelson]

I have been given the opportunity to invest in some local farming land but have some hesitations and was wondering if this was a good option.  I have heard that land investment would diversify my portfolio while providing farm rental income (vs future CRP) and hunting land.  I am a young physician so I have plenty of time to let the land appreciate (or even let it be passed on to my children, or donate to charity).  I am concerned that the rental income will be heavily taxed since I am in the top tax bracket, decreasing potential returns.  Also regarding taxes: I already have a primary residence and lake home (two mortgages); so I would not be able to deduct further property tax or mortgage interest payments, correct?

[Rando]

I am by no means an expert on this, but living in Iowa I have seen this done and I looked into it pretty seriously several years ago.  I believe the way you do it is to set up an LLC and purchase the land through that.  The income would be paid to the LLC and then you can deduct out the expenses, including loan interest.  Unless you are knowledgeable in this area you may have to hire a manager to handle the details of renting the land, filing the CRP paperwork, interfacing with the farmers, etc.

 

Since you are handling this through an LLC I don't think your personal mortgages have any bearing on deductions.  Of course what you are doing in a way is betting on the value of farm land.  If you do it right you can come close to breaking even while you are paying off the loan then sell the land at the end for a nice profit.

 

If you are just talking about buying the land outright with a lump sum I am not familiar with that.

[Zaphod]

I've heard farm land sold as an inflation hedge or general hedge was all the rage for years (from wall street marketing) and has earned poor returns. If you plan to work it in some manner maybe, but unless you're familiar with the intricacies of farming/land/taxes in that field I'd make sure someone who does is doing that due diligence.

[RocDoc]

I come from a farm family and am still somewhat involved in the family farm (mainly grain farm and some land lease money for potash, no cattle or livestock.) Although the family farm is in Canada, I think some of my information might generalize to American farmland too.  I would be cautious about having too much of your net worth in farmland or investing too big a chunk of money right now. Farm prices and farm financial productivity can be very cyclical. Farmland is also very expensive at this time (partially due to low interest rates and many large corporate investors buying up farm land.) I can remember in the 80's land prices plummeted due to high interest rates and farmers had trouble selling their land. I also remember in the 90's farmers couldn't even make their production costs due to low grain prices. The last 7 or 8 years have been the best years for farm land prices and farm production profit that I or my seventy year old father can remember. I'm not saying farming or farmland is a bad investment- it has performed spectacularly in the last decade. But I would advise doing a lot of research before you spend your hard earned money. We could be at a peak farm land prices.

[Hatton]

My husband and I own a small 20 acre farm. The value has doubled from when we bought it in 2010.  Rural land was very depressed at that time.  We got a good price.  We have some cattle on it.  We lease another farm to grow hay for the cattle.  My husband enjoys the work.  There are many ongoing expenses if you utilize the property for crops or cattle.  Lots of equipment for either.  Cattle need fencing, food, vet bills, and water.  Row crops require lots of equipment, fertilizer etc.  land prices are very localized and vary with improvements.  Lots of share cropping  agreements.

[jfoxcpacfp]

dmnelson wrote:

I have been given the opportunity to invest in some local farming land but have some hesitations and was wondering if this was a good option.  I have heard that land investment would diversify my portfolio while providing farm rental income (vs future CRP) and hunting land.  I am a young physician so I have plenty of time to let the land appreciate (or even let it be passed on to my children, or donate to charity).  I am concerned that the rental income will be heavily taxed since I am in the top tax bracket, decreasing potential returns.  Also regarding taxes: I already have a primary residence and lake home (two mortgages); so I would not be able to deduct further property tax or mortgage interest payments, correct?

Click to expand...

Whether real estate is a good option is not a one-size-fits-all answer. The price of farmland in our area has gone down in the last year after being really high for a few years. Location matters. Also that you know what you're doing.

As for taxation, don't worry: it's very unlikely you will have taxable income. Lots of expenses go into farming, even rental.

The mortgage interest will be deductible. The limitation is for residences.

Regarding hunting, your biggest concern should be liability. Be sure to purchase within an LLC.

Do your due diligence and make sure this truly is an opportunity for you and not for someone who has a "doctor deal" for you.

[G]

I have idyllic thoughts of owning a farm, but the realities of making money off of it vs the effort involved have always been daunting.  To scratch my itch, I've made a collection of farmland REITs (AFCO, FPI, LAND).  For what it's worth, I did the same with timber (CTT, PCH, RYN, WY).  The yields on these range around 4%.  The textbook says they're supposed to be a hedge against inflation; of course it also says they're not supposed to be correlated with stocks and that didn't seem to work so well with the last 7 years.  I have all this in tax-protected so tax issues are null.

Keep us posted on what you decide and how it turns out!

[Wiscoblue]

I bought 200 acres of land in 2003 in rural SW Wisconsin for $1500 an acre. Paid cash for it. There's 100 tillable and 100 woods for hunting. I rent the tillable for @120 an acre and use the woods for hunting morels, deer and turkey. My ROI is 4% which is pretty good. In addition, land values have gone up quite a bit. Land has been selling for between $2800 and $3000 an acre. My taxes are only $600 a year as there is no real dwelling on the property (except for a small hunting shack). There is no maintenance cost and no hassles from the farmer who I have come to know quite well over the past 14 years. When it's time to sell, I will log all the oaks, maples, hickory and black walnut. That should net me another 100K.

The best time to buy land was yesterday. The second best time is today........

[q-school]

we've looked at it a bunch of times but never pulled the trigger.  partly because the land is close to all time highs.  partly because everyone who owns a farm tells me not to do it.  except the ones looking to sell of course.

we have looked a bunch of different ways.  partnership with other doctors, joint venture with farmer who wants to expand.

at least where we are, crop prices are terrible, and land is at all time high.  not good combination right now from my perspective, especially when we think if things continue, there will be at least a downturn in land prices.  cyclical business.

ymmv

i think it all depends on how much you want to do yourself, and how much you can get the land for.  you make your money on the price of the land.

[Craigy]

Unless you are sophisticated in farms, farming, farmland, you're just a sucker with a pocketful of money.  In this case, you're a speculator.

There's a good chance you could make some money, but there's a good chance you could lose some (most) of your money too.

Many states give substantially lower property tax rates to farmland, so that might help you out.  But there's a lot of variables that you need to be more than familiar with before you take the plunge.

[erictait]

We invest in farmland, but internationally.

 

We have found U.S. farmland to be expensive these days and have shied away from it.

 

One reason is we are staying away from typical "commodity" crops as we like to avoid boom, bust cycles.

 

We want agricultural products that have a specialty component to them (value add) and there is an increasing demand for the crop but a decreasing supply

of arable land on which to grow it (because of climate change and/or armed conflict).

 

Like any real estate, you want to look for increasing demand and decreasing and/or constrained supply, so if the farm land you are looking at does not have

these characteristics in terms of the crops they are yielding, I would stay away.

 

Also, make sure there is a cash flow component, raw land is not really an investment, it is speculation on price.

[Wiscoblue]

Corn is $ 3.89 a bushel. Soybean is $10 a bushel. Both are off their peaks from 10 years ago. At 150 bushels an acre, the revenue is close to $600 an acre. After expenses (assuming you own the land outright) the returns could be $450 an acre. Farmers who own 1000 plus acres of tillable are doing all right! Most of the work is in May (planting) and November (harvest).

Who says there's no money in farming?

A couple of years ago at a party, I met a fund manager for a large Private University. They have over $30 billion under management. We talked about farmland prices and he said that many funds were buying up large tracts of farmland in the Midwest (Iowa and Minnesota in particular) just for the revenue and potential for capital appreciation.

I am convinced that farmland is a great investment. Of course, it depends on the price, location, soil quality, average yields etc. and due diligence would be necessary. A little bit of knowledge about farming would help too.

[GXA]

I own about 80 acres that I purchased strategically in the path of development.  I do not think the finances make much sense unless it is in the path of growth.  I cash rent the land to farmers, and the rent they pay covers my interest and tax expenses.

40 of these acres are under contract to sell to a developer next spring.  That should go through, and if it does our gains will be significant. I am planning a 1031 exchange to defer capital gains.

This has been a great investment for us, but needs to be done carefully and strategically.