As an investor, you have lots of choices when it comes to spending your money. After all, there are lots of ways to expand and diversify your portfolio. One way that has gained significant attention in recent years is that of a farmland REIT. But what exactly is a REIT? And why should you consider it as a viable investment opportunity in 2022?
Let’s find out.
What is a REIT?
A REIT is a Real Estate Investment Trust Fund. It’s a vehicle that helps people invest in farmland and is an attractive option. After all, farmland has traditionally been viewed as a safe long-term investment that offers decent returns. This is because the land that you invest in steadily appreciates over time and is supplemented by crop-driven rental income. Investors also view farmland as a good way to hedge inflation, while it’s not as volatile as other asset classes.
Therefore, farmland REITs present an excellent long-term investment opportunity for anyone looking to diversify their portfolios.
How do REITs work?
Primarily a farmland REIT provides capital to farmers. The owners of a REIT typically complete what is known as a sales-leaseback transaction, which sees the Trust purchase the land from the farmer before leasing it back under newly established terms. By doing this, farmers are able to stay on their land by agreeing to a long-term lease while unlocking capital that allows them to expand their operations.
On the flip side, the arrangement enables investors to access farmland in a trusted and relatively straightforward way. In the past, farmland investment was only really an option for the wealthiest in society. But the introduction of farmland REITs has blown the market open and enables everyday investors to place their money in farms.
Advantages of Investing in a Farmland REIT
Of course, every form of investment is risky, but farmland REITs typically present an attractive proposition for investors. First and foremost, they’re an excellent way to diversify your portfolio. Given the long-term nature of the investment, it allows you to balance your portfolio with more volatile asset classes - such as cryptocurrencies - and contributes to your holding of the likes of stocks and bonds. It’s also a viable addition to your real estate investment portfolio, providing you with another way of seeing potential long-term returns on your initial investment.
While mentioned already, another benefit is that farmland REITs are a good inflation hedge and are typically seen as better options than the likes of stocks, bonds, and even gold. Finally, when you invest in a farmland REIT, you see two sources of return:
Ultimately, investing in a farmland REIT is a great way to bolster your investment portfolio and is likely to stand you in good stead from a long-term perspective.
Are there any Drawbacks?
No investment is risk-free, and there are some unique potential pitfalls associated with investing in a farmland REIT. Natural disasters play a big role in a farm’s profitability, and the likes of flooding or storm damage can cause your investment to dip. Another thing that can affect your investment is the price of crops, which are seasonally volatile. The prices of soy, wheat, and corn will all affect annual farm income, as well as the costs of meat and dairy.
The Best Farmland REITs to Invest in this Year
So, investing in a farmland REIT isn’t risk-free. But now that you’ve weighed up the pros and cons of this unique form of investment, what are the best farmland REITs to invest in this year? Let’s take a look.
Established in 1997, Gladstone Land Corporation was the first farmland REIT in the US. By the end of 2021, the company had an investment portfolio in excess of $700 million. Gladstone owns more than 94,000 acres of farmland, split across 127 farms in thirteen different states. Essentially, if you’re looking to get in on the act, Gladstone is the company to trust.
Their portfolio includes a significant amount of land where tenants are able to grow fresh row crops, such as vegetables and berries. Their focus on fresh crops is born out of the realization that they’re less susceptible to market volatility than commodity crops.
What’s more, Gladstone operates a traditional equity REIT model, which generates money via rental arrangements following farmland purchases. Shareholders also benefit from monthly dividend payments, which have been paid ever since the 2013 IPO. Gladstone has an impressive track record over the years and is one of the first companies you should consider if you’re looking to add a farmland REIT to your portfolio in 2022.
With a market cap of less than $400 million, Farmland Partners is considerably smaller than Gladstone. Still, the corporation currently owns more than 155,000 acres of land in sixteen different states. Their focus is investments in high-quality US farmland, but they also add ‘special cases’ to their portfolio, which allows them to diversify and seek out unique opportunities.
Farmland Partners actively work with farmers to improve their farms and reduce their output costs, which drives up productivity and profit. The majority of FP’s portfolio - around 70% - is farms growing commodity crops. The remaining land focuses on the growth of citrus and other fruit trees in different parts of the US.
FP also generates income from its involvement in wind and solar energy, as well as crop insurance policies. We’re impressed by the diversity of the FP portfolio, making it another good option if you’re planning to invest in a farmland REIT in 2022. (Related: Farmland Investing: The Returns & Diversification Power)
The Verdict: Which Should You Opt For?
The truth is that both Gladstone and FP provide everyday investors with the perfect opportunity to invest in a farmland REIT in 2022. They have shown a consistent performance in the stock market over the years, with significant growth and expansion since their establishment.
As is the case with any investment that you make, be sure that you can afford to invest in a farmland REIT and understand that the value of your investment can go up or down.
How to Invest in a Farmland REIT
Now that you know what a farmland REIT is and which options you have, it’s time to put your plan into motion. You can buy shares in a REIT just as you would buy shares in the stock market. You can trade your shares in a REIT on an investor platform, or you can contact an investment firm to take care of the trade on your behalf. Just be aware of commissions and other costs associated with your investment if you go down this route.
Investing in a farmland REIT is undoubtedly the easiest way to invest in farmland. You can invest what you can afford, and it’s a handy way of diversifying your portfolio. While farmland REITs have a strong performance history, the truth is that the value of investments can go up and down, and there’s no such thing as a zero-risk investment.
Still, we’d encourage you to consider a farmland REIT to strengthen and diversify your investment portfolio in 2022.