When you bring up the term “investing,” most people think of stocks. This is because the stock market is the most popular asset that people commonly invest in.
If you try discussing farmland with a group of stock market investors, they will probably give you a puzzled look. Farmland investing is growing in popularity, but it is still far less common than investing in the stock market.
The main reason why more people do not own farmland is due to accessibility. It is easy to buy stocks through a brokerage. In a matter of seconds, you can own shares of any publicly traded company you want to.
Farmland, on the other hand, was more difficult to access. However, in recent years, it has become easier thanks to technology and innovations. FarmFundr has opened up the realm of farmland investing to individual investors. It may not be as easy as going out and buying a stock, but it is much more accessible than it was before.
Accredited investors can buy fractions of real operating farms with minimum investments as low as $10,000 with FarmFundr.
Before diving in, let’s cover some of the core differences between investing in farmland versus investing in the stock market.
The first difference between the two is the type of risk involved. Both farmland investing and stock investing have risks, they are just different.
Risks with farmland investing include things like the weather. Let’s say a region experiences a dry season or even a drought. This would negatively impact farming operations in that area. Now, the risk here is mainly on the farmer. If you simply own the land and rent it to the farmer, you would still get your lease payments in an ideal situation. However, many bad seasons could force a farmer to go out of business. At this point, you would have a vacancy. It could take some time before you find a new farmer looking to lease that land. The good news is, most farmers sign long term leases that span many years when renting farmland.
Risks with the stock market include things like politics and even fraud. While it is uncommon, there have been numerous fraudulent companies in the past that caused investors to lose millions based on false pretenses. Publicly traded companies are heavily regulated, but they can’t catch everything. As far as political risk goes, things that happen with our government and other governments all over the world often have an impact on the market. For example, the trade war between the US and China caused both markets to drop on numerous occasions.
Next, let’s consider the historical returns or performance of each investment.
As an asset class, farmland has returned a healthy 12.1% over the last 20 years. This means that a $10,000 investment in farmland 20 years ago would now be worth over $131,400.
Over the same time period, the S&P 500, a collection of stocks of the 500 largest companies in the US, returned 9.2%. With these returns, the same $10,000 investment would be worth only about $58,000 today.
Based on the last 20 years of data, farmland has significantly outperformed the stock market. You would have made more money investing in farmland than stocks. However, another important factor to consider is the volatility of each investment. Volatility is simply a statistical measurement of the ups and downs that an investment experiences.
An asset with high volatility sees frequent ups and downs with the price. On the other hand, low volatility assets see less ups and downs. Unfortunately, humans are programmed to base our decisions on these up and down movements. Oftentimes, you will see a lot of panic selling when the market is down, which is usually the worst time to be selling. In a nutshell, most of us do not do well with volatility.
Over the last 20 years, there have been many highs and lows with the stock market. This timeline included the second worst crash of all time known as the Great Recession. It should come as no surprise that the stock market is quite volatile when compared to other assets out there.
Farmland on the other hand, has not had a year with negative returns since before 1990. As a result, an investment in farmland is about 1/3 as volatile as an investment in the S&P 500. Returns exceeded the stock market, while being significantly less volatile.
Lastly, it is important to consider the liquidity of each investment. For those who are not familiar, liquidity is a measurement of how easily an asset can be sold and converted into cash.
The stock market is a highly liquid investment. Trades take place on centralized exchanges, and if you trade listed stocks there is almost always a buyer or seller on the other end ready to transact. If you wanted to liquidate your entire portfolio, you could do this in minutes. This is one of the main reasons why the stock market is so volatile.
Real estate, including farmland, is not a highly liquid investment. Think about the process of selling a house. Do you usually find a buyer in seconds like you do with the stock market? In most cases, no. It may take a few weeks or even months to find the right buyer. It is the exact same way with farmland. It’s not as easy to buy or sell as a stock. When investing in farmland through online platforms, you should be prepared to hold onto this investment for the entire duration. Each platform should specify how long this holding period is.
In the case of FarmFundr, this holding period ranges from 5 to 15 years. Investors should be prepared to hold their investment for at least this long . For now, there is no secondary market.
There is no such thing as the perfect investment opportunity. As we have seen here comparing the stock market to farmland, each asset has pros and cons. In fact, most experts would probably agree that both stocks and real estate belong within a well rounded portfolio.
If you enjoyed this article, please check out my beginner’s guide to farmland investing.
Author: Ryan Scribner