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Financing Options for Farmland Investors

Farmland can be a lucrative, profitable investment. But how do you secure the capital to get in the game? Here are some financing options for farmland investors.
September 1, 2023

Investing in farmland is not just about cultivating crops. It's about sowing seeds of financial prosperity. 

Prominent investors like Warren Buffet and Bill Gates make farmland part of their portfolio. So you may be wondering whether it’s worth adding to yours. 

If you want an asset that can deliver stable cash flow, steady appreciation, and numerous tax benefits, you may be a good fit for farmland investing. The big question is: how do you finance such a large investment? 

Fortunately, there are plenty of financing options out there for potential farmland investors. Let’s discuss how to take advantage of them so you can start reaping the benefits listed above. 

Advantages of investing in farmland

In recent years, farmland values have experienced steady growth, and the forecast indicates that this upward trajectory will persist. According to industry experts and insightful analyses, the prevailing trends in farmland valuation are set to stabilize and even reach their peak in the year 2023.

Yet looking to the distant future, as every responsible investor should do, there are plenty of reasons why farmland will continue as a lucrative investment. 

With population growth, rapid urbanization, and an ever-increasing demand for agricultural resources, the allure of land investments becomes even more enticing. In other words, as the world's population grows, so does the demand, and land investments are becoming the more lucrative option for investors.

Investing in farmland offers a multitude of advantages:

  • Stable cash flow. Through rental income from tenants, many investors lease the land for farming, creating a stable cash flow and creating a mutually beneficial partnership. 
  • Potential for appreciation. With an increasing demand for agriculture and a limited supply of land, the value of farmland continues to surge over time making it a lucrative investment.
  • Tax advantages. Potential deductions for expenses related to the upkeep of the property, exemptions, and favorable capital gains treatment, benefiting investors financially.
  • Multiple revenue streams. Crop yields, livestock production, and potential for renewable energy projects, providing diversification and long-term financial stability.
  • Intangible benefits. Fostering community ties, safeguarding agricultural land for future generations, and creating a lasting legacy to pass down to children, ensuring the preservation of vital resources and traditions.

How to purchase farmland

There are several avenues available to purchase farmland, each with its own set of benefits and drawbacks. Let's explore the most common options and provide some tips for success. 

Land auctions

Land auctions can be an excellent way to purchase farmland quickly, as the sales cycle typically lasts a few weeks. On the flip side, buyers at auction face stiffer competition, and the final sale price may be higher than anticipated.

Some tips for success: 

  • Research and preparation. Before attending a land auction, thoroughly research the properties up for sale. Study the local market, recent sales, and unique features or challenges. This information will help you make informed decisions and set a budget.
  • Set a budget. Determine your maximum bid amount based on your financial capacity and the value you perceive in the property. Establish a limit to avoid exceeding your budget in bidding wars.
  • Due diligence. Although time is limited for auctions, be sure to research the land. Inspect the property, review any available reports or surveys, and clarify any potential issues in advance.

Private sale

Private sales offer buyers more time to conduct due diligence on the property and can result in a lower purchase price than land auctions. However, the process can take longer, and finding the right property can be challenging.

Some tips for success:

  • Network and establish connections. Build relationships within the farming community, attend local events, and join relevant associations to increase your chances of hearing about private sales early on.
  • Engage with local landowners. Approach landowners directly, demonstrating your serious interest in purchasing farmland. Building trust and credibility may lead to potential sales and valuable insights.
  • Hire professionals. A qualified real estate attorney and a land surveyor to help you navigate the complexities of private sales. They can help review legal documents, conduct surveys, and ensure the property aligns with your needs.

Real estate agents & land brokers

Real estate agents and land brokers can assist buyers in finding and purchasing farmland. Real estate agents can provide valuable information on the local market, but their fees can be high, increasing the transaction cost.

Some tips for success:

  • Choose a specialist land broker. Collaborate with a real estate agent specializing in agricultural properties, well-versed in farmland investments.They will have a deeper knowledge of the market, zoning regulations, soil quality, and other important factors
  • Clearly communicate your criteria. Share precise criteria and preferences with your agent to streamline the search process. This ensures you narrow down the options and they will present you with properties that match your requirements. 
  • Assess potential returns. Real estate agents can provide insights into the potential rental income or resale value of the farmland. Consider the projected returns and assess whether they align with your investment goals and financial expectations.

Online marketplaces

In traditional farmland markets, there’s always the risk of a zero-sum game. There’s only so much farmland to go around, and as soon as word spreads about an auction, everyone in the community will likely descend on it.

An online marketplace can help you expand your reach into markets that you may not have otherwise considered. Whether it’s new ground up for sale, or a recent inheritor looking to liquidate his farm, online marketplaces can clue you into new opportunities. 

This is especially helpful if you’re new into a community and have yet to establish roots. Or, if geography isn’t a factor to you, you can look up available listings across the country.

Some tips for success:

  • Trust, but verify. Start with the online listing, but don’t neglect your due diligence. 
  • Find a trustworthy marketplace. Look for an online marketplace with a solid reputation. Ideally, you’ll find a marketplace with rigorous internal validation practices to ensure every listing is trustworthy.
  • Don’t limit yourself. Using an online marketplace doesn’t mean you forego the land broker, or avoid farm auctions. Use it in tandem with traditional methods—that way, you don’t miss out on a golden opportunity. 

Financing options for farmland investors

Considering the steep upfront investment for farmland, it's important to explore different financing options. 

When considering a financing option, you should weigh multiple factors, including creditworthiness, down payment size, interest rate, repayment period, and associated fees.  

1. Traditional mortgages & farm credit

Traditional mortgages, offered by banks and credit unions, require a substantial down payment but provide advantages such as lower interest rates, a fixed rate, and a repayment period of up to 30 years. 

Specifically, Farm Credit banks specialize in lending to agricultural professionals and offer a range of financing options, including long-term fixed-rate loans, variable-rate loans, and lines of credit. It’s an attractive choice for investors knowledgeable in the agricultural industry.

2. USDA loan

USDA loans are designed to assist farmers and rural residents in obtaining financing for farmland purchases. USDA loans offer several benefits, including low-interest rates, flexible repayment terms, and low-down payment requirements. However, they’re only available for properties located in eligible rural areas.

3. Private financing

Private financing can be an excellent option for investors who don’t meet the requirements of traditional lenders or who want to avoid the bureaucracy associated with government-backed loans. 

Private financing typically offers higher interest rates than traditional loans, but the approval process is usually faster, and the lender may be more willing to work with borrowers who have less-than-perfect credit.

4. Land contracts

Land contracts, also known as “contract for deed”, involve the buyer making payments directly to the seller over a specified period. The buyer gains equitable title to the property, while the seller retains legal title until the purchase price is paid in full. However, land contracts typically involve higher interest rates and a higher purchase price than traditional financing. 

Land contracts can be an excellent option for buyers who have difficulty obtaining financing through traditional lenders or who want to avoid the closing costs associated with traditional financing. 

Final thoughts on financing options for farmland investors

Investing in farmland can be a smart financial move, offering stability, and potential appreciation. With the availability of diverse financing options, investors can overcome the initial capital hurdle and take advantage of a lucrative farmland market.

If you're looking to invest in farmland, our GroundOS partners can help.

Check out the CommonGround marketplace for an investment opportunity with one of our GroundOS partners.

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