Investors who don't want to put all their eggs in one basket might consider diversifying their portfolios by investing in farmland.
You can own farmland by investing in a real estate investment trust (REIT) or through a crowdfunding platform. Both are vehicles that let everyday people and accredited investors own a piece of Americana -- and potentially reap the profits of what they've sown.
Farmland assets have outperformed the stock market for decades, returning an average annual return of 12.6%, compared to the S&P 500 average of 11.1%.
Of the roughly 911 million acres of farmland in the United States, about 283 million acres, or 30%, is owned by non-operator landlords looking to capitalize on the investment opportunity without actually farming, according to the U.S. Department of Agriculture.
Rising food prices could make farmland an attractive investment if you're looking for diversity in your portfolio.
Over time, farmland returns on investment have been consistently positive since 1991 compared with the value of gold or the stock market, which can rise or fall by up to 50% in a single year.
Farm out the work to REITs
Real estate investment trusts (REITs) are created to own and operate real estate. As its name implies, a farmland REIT invests in farms. Just as with any other type of REIT, a farmland REIT takes care of the management, and investors receive dividends.
Gladstone Land Corporation (LAND 0.28%) owns 164 farms in 15 states, totaling about 113,000 acres. The REIT's farms are 100% leased to 85 tenants and growing more than 60 different types of crops.
Gladstone, which has a history of steadily growing its dividend, focuses on buying high-value farmland that generates above-average revenue and profits. It looks for properties with an adequate, clean water supply; fertile, nutrient-rich soil; and good weather with long growing seasons in established markets.
Since its IPO in 2013, Gladstone has made 108 consecutive monthly cash distributions, increasing the rate 25 times for a total of 51%.
While Gladstone's stock price declined 0.53% over the past month, it's up 81.96% over the last year.
Denver-based Farmland Partners (FPI -0.08%), the biggest of the farmland REITs, buys high-quality farmland throughout North America. It owns about 160,000 acres in 17 states that are farmed by more than 100 tenants who grow 26 major commercial crops. Farmland Partners also manages 26,000 acres.
While the REIT has a troubled past, its portfolio of high-quality farmland and strong balance sheet with 60% equity and $40% debt -- a good mix for quality farmland -- could make it ripe for the picking.
Farmland Partners stock is up about 12% in the last month and about 27% in the last year. The REIT's operating revenue increased to $13.89 million during the first quarter, up from $11.58 million during the same period a year ago.
Farmland crowdfunding platforms
AcreTrader gives accredited investors access to farmland. Most of the crowdfunding platform's offerings require an investor to purchase 10 shares, equivalent to 1 acre of land, which typically costs $3,000 to $10,000 an acre.
AcreTrader distributes excess annual income to its investors and generally expects a yield of up to 5% for lower-risk properties -- in addition to the expected annual appreciation of the property.
Taking value appreciation into account, AcreTrader shoots for an internal rate of return of 7% to 9%, compared to a historical IRR of 12% because of depressed commodity prices and the platform's conservative underwriting.
AcreTrader investors generally sell their ownership in five to 10 years. When the property is sold, they get their principal and any appreciation realized over the hold period.
If you invested $10,000 in 1991, it would be worth $215,800 today.
AcreTrader says, "with a growing global population and shrinking U.S. farmland acreage, the laws of supply and demand are clearly in favor of farmland investing." If you're looking for a new form of real estate investing that doesn't involve excessive property maintenance or hands-on work, investing in farmland may be an attractive and lucrative option.