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Farmland Investment as a 1031
Alternative
Investment in unimproved agricultural real estate is proving to be a very
attractive alternative for reinvesting funds generated from real estate
sales. This is particularly true for those who have difficulty in
completing 1031 exchanges because they are unable to locate a commercial
property meeting their investment criteria within the time frame required
by the IRS.
A number of factors make agricultural real estate a prime target for those
seeking to exchange like-kind properties. Probably the most obvious
advantages are as follows: Liquidity, Safety, and Profitability. |
Liquidity
Contrary to many perceptions, one of farmland's characteristics, especially as it is found in the Eastern Corn Belt, is
liquidity. It is much like
a commodity, and there is a limited supply! At any point in time, there is a ready buyer who will pay the
market price as established by other comparable sales in the area. Most
often, the entity looking to purchase farmland is a farm operator.
Sometimes, however, developers looking to establish housing projects will
purchase the property.
Presently, a combination of low interest rates and strong commodity prices
are making farmland extremely desirable as an investment for producers
seeking expansion. And the credit industry is eager to finance these
purchases for both producers and passive investors alike. Present
circumstances in Michigan's Saginaw Valley, for example, are allowing
highly leveraged farmland to service debt solely on the cash rental rates
currently being offered by producers.For
investors seeking to liquidate a farmland investment, the process is
usually relatively quick. Hence, it is the perfect investment for those looking to
"park" their funds until the commercial investment they have been seeking
materializes. |
Safety
Farmland is not subject to wide swings in market prices as is sometimes
seen in other types of commercial investments. The agricultural economy in
the U.S. changes slowly, hence asset values directly tied to production
agriculture move in a similar cadence. Also, unimproved property has
little risk, since there can be no structural failure if structures are
absent in the investment. |
Profitability
As mentioned earlier, cash rental rates are good. Rent per acre, as
matched against price paid per acre, will return 5% to 8% net
yields, making no allowance for appreciation or inflationary moves in
the value of the asset. Generally, an investor has been able to expect
total returns in the form of cash and increased property value (on an
annualized basis) of 8% to 12%, but 15% or more is not uncommon.
Enhancing the investment even more are the tax
advantages allowed via the depreciation of drainage material, irrigation,
and permanent plantings. Orchards, for example, are allowed to be
depreciated, thereby offsetting immediate taxable gains created by the
cash rental process.
[ Up ] [ Farmland Investment as a 1031 Alternative ] [ Why Michigan Farmland? ] [ Concluding Remarks ] |
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