Investors have increasingly begun exploring unconventional avenues of wealth creation due to technological advancements. Traditional real estate investments such as residential and commercial properties are now being compared to farmland investments. Now, the focus has shifted to evaluating returns on farmland investments in comparison to returns on other real estate options.
In this blog, we take a closer look at the risks, returns, stability, and long-term potential of farmland investment compared to other real estate assets.
Farmland as an Investment Asset
Before we make comparisons, it is imperative to define what a farmland investment entails. Simply put, farmland investment is the purchase of agricultural land with the intent of producing income through growing crops, leasing the land to farmers, or selling the land at a later date for a higher value. Farmland is classified as alternative real estate, and, its greatest attribute lies in its tangible nature, ability to hedge against inflation, and rising demand for food and biofuels.
Investments in farmland do not depend on urban development, as most commercial or residential real estate do, and do not use rental income generated by tenants. Rather, farmland investments are dependent on market prices of agricultural produce and the productivity of the land. Unlike other forms of real estate, farmland investments offer a different profile of risk and return, which is rather favorable in times of economic volatility.
Historical Performance: Returns on Farmland Investment Vs. Return on Real Estate
When considering investment options, one of the most important factors to consider alongside the timeframe is the expected return on investment. Historically, the returns on farmland investment, unlike other investments, have provided remarkable consistency and resilience.
Farmland Investment Returns
Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) indicates that U.S. farmland has generated returns between 10-12% on average per annum over the last two decades. These returns comprise of:
- Most Operating Income (Revenue made via leasing or crop production)
- Capital Appreciation (Increase in farmland value)
Although other forms of real estate suffered from steep losses during the 2008 financial crisis, farmland investments did not. Farmland investments are suitable for risk-averse investors looking for stable and consistent growth since shifting economic conditions do not seem to impact the returns.
You may also read this: Comparing Farmland Returns with Other Real Estate Investments
Return on Real Estate Assets: Residential and Commercial
On the other hand, traditional real estate assets which include residential and commercial properties have been more volatile. Residential real estate typically yields an annual return of between 6% to 9% when income from rentals and property appreciation is considered. Commercial real estate is capable of providing higher returns, generally in the range of 7% to 12%. It comes with greater risks, including increased market dependency, higher maintenance costs, and tenant turnover.
Furthermore, residential and commercial real estate are more susceptible to downturns during recessionary or financially unstable periods, as seen with housing market crashes and slowdowns in retail business.
Stability and Volatility: Farmland Investment vs Traditional Real Estate
Besides volatility, there are other factors that are important to consider. The returns on farmland investment are often regarded as exceptional due to their weak correlation with other traditional financial markets and real estate sectors. This suggests that farmland has the potential to serve as a stabilizing asset in a well-diversified investment portfolio.
Why Farmland is More Stable
- The food and commodity markets are less volatile due to their ongoing and steady need.
- Less connected to suburban economic cycles.
- Predictable incomes are associated with long-term contracts taken up by farmhands.
- As the price of commodities increases, the income from farmland also tends to escalate. Thus, there is a hedge against inflation.
Volatility in Traditional Real Estate
Commercial and residential real estate is directly affected by consumer trust, interest rates, and employment trends. Rent defaults, vacancies, and declining property values make return on real estate investments far from predictable as is the case with returns on farmland investments.
Inflation Hedge: Farmland vs. Real Estate
There’s no denying that inflation undermines the value of an investment’s returns, but farmland investment, unlike real estate, is viewed as a stronger hedge against inflation.
The Power of Farmland
The returns on farmland investment in farmland grow during periods of inflation due to the heightened demand for agricultural products like grain, dairy, and meat. Furthermore, the value of farmland almost always increases with inflation.
Real Estate’s Performance
Classic real estate also functions adequately as an inflation shield. Property prices and rents typically grow with inflation. However, the response lag is too long and often controlled by external factors like rent ceilings in residential areas, diminishing the effectiveness of the shield.
Risk Profile: A Comparison
Every investment has its unique set of challenges, and understanding them is critical before placing any capital.
Risks of Investing in Farmland
- Weather risk exposure: Droughts or floods can affect yields.
- Commodity price risk: The prices of the crops fluctuate for various reasons each year.
- Operational risk: If the investor is running the farm, skill and knowledge become essential.
- Liquidity: Farmland may require a longer time to sell than urban properties.
In spite of these risks, a large portion can be minimized through crop insurance, leasing contracts, and professional farm management.
Risks for Investing in Traditional Real Estate
- Tenant risk: Non-payment of rents, eviction, and maintenance problems.
- Market risk: The selling price or value of the property depends on the market condition of the locality.
- Regulatory risks: Zoning restrictions, rent control, and alterations in taxation policy.
- Economic sensitivity: Significantly affected by overarching economic factors.
Although both sectors face risks, farmland is viewed as comparatively less volatile, especially during recessions or downturns in the equity market.
Income Generation: Passive vs. Active Returns
Both asset types differ in the manner income is derived.
Passive Income from Farmland
Investors can earn passive income through leasing farmland to agricultural companies or operators without the burdens of property management. Moreover, if farmland is professionally managed, investors can earn yields without requiring any active involvement.
Active Income from Real Estate
Owning residential or commercial real estate usually requires active property management or comes with the option of hiring a third-party property manager. Managing the tenants, repairs, taxes, and upkeep can be very tedious and expensive, diminishing returns on real estate investments.
Environmental and Ethical Investment Potential
Modern investors are not only interested in making profits but also in the impact behind their investments.
Sustainable Farmland Investment
Investors can align their funds toward the sustainability goals of regenerative agriculture along with modern farmland investment. Organic farming and carbon sequestration techniques enable investors to achieve financial returns while protecting the environment. Returns on farmland investment extend beyond monetary gains, as they help advance global food security and climate change solutions.
Real Estate and Sustainability
The construction of green buildings and energy-efficient homes is clearly on the rise. At the same time, urban real estate development tends to have a greater carbon footprint and negatively impacts the environment across the world. Still, both are advancing with the adoption of ESG (Environmental, Social, Governance) factors.
Liquidity and Exit Strategies
The only drawback to farmland investing is its lumpy liquidity. For instance, selling agricultural land can take anywhere from several months to years based on prevailing market conditions and how strategic the property’s location is. That said, it is changing for the better with the advent of farmland investment platforms along with REITs (Real Estate Investment Trusts) that focus on agricultural land.
In contrast to farmland real estate, traditional real estate is arguably more liquid. In highly sought-after metropolitan areas, urban residential real estate is especially liquid. Turnover of properties usually occurs at a faster rate, although there are times when the value of such properties can drop significantly depending on the prevailing market conditions.
The Verdict: Which Provides Greater Returns?
In summary, both asset classes have their benefits, but returns on farmland investment are generally more consistent and less volatile than traditional real estate. This is their comparative study’s snapshot:
| Feature | Farmland Investment | Traditional Real Estate |
| Average Annual Returns | 10–12% | 6–10% |
| Volatility | Low | Moderate to High |
| Inflation Hedge | Strong | Moderate |
| Income Type | Passive | Active |
| Liquidity | Low to Moderate | Moderate to High |
| Sustainability | High | Variable |
Final Thoughts
In this case, whether you are a conservative investor searching for stability or an impact investor in search of ethical and sustainable solutions, it is hard to ignore the compelling narrative behind farmland investment as an alternative to traditional real estate. The returns on farmland investment are, without a doubt, competitive, but what stands out is the structural resilience and diversification these investments offer.
These seem quite stunning now: with the world’s population increasing alongside arable land, the long-term prospects for farmland investment appear increasingly promising. While, on the other hand, traditional real estate continues to be a potent means of wealth accumulation, particularly in rapidly urbanizing areas. Understanding your risk tolerance, investment goals, and where you want to place your capital is essential.
To achieve the balance in a portfolio, it’s best to consider both farmland and urban real estate because farming provides steady returns while return on real estate offers more in terms of profit.