My immediate response would be, who’s asking? An investor or a farmer?
Because their goals for farmland can be completely different.
Farmers have multiple reasons why farmland might be a good investment beyond simply looking at the rate of return. For this analysis, let’s look at it from the perspective of an investor.
This could be someone who’s no longer farming but still owns farmland, or someone who’s inherited farmland and is wondering what to do with it.
To determine whether farmland is a good investment, we need to look at two things: the rental income it generates and how much the land appreciates over time.
How Much Income Does Farmland Generate?
Let’s start with a couple of assumptions:
- One acre of farmland is worth $6,000.
- One acre generates $130 per year in rental income.
Dividing $130 by $6,000 gives us an annual rental return of approximately 2.17%.
Is that a good rate of return? Let’s compare it to some alternative investments.
GICs and Savings Accounts
For our example, let’s assume you can find a GIC or savings account paying 2.50% per year.
Investing $6,000 in a GIC paying 2.50% would generate $150 annually. That’s $20 more than the farmland rental income.
Dividend-Paying Stocks
There are many stocks to choose from, but let’s keep things simple and use RBC, one of Canada’s largest companies.
Assuming RBC pays a dividend of 3.70%, investing $6,000 would generate approximately $222 per year in dividends.
That’s $92 more than the farmland rental income.
Of course, stocks come with different risks than farmland or GICs, and dividend payments aren’t guaranteed.
Comparing the Income
With farmland valued at such high prices, rental income alone may not look particularly attractive compared to other investments.
The difference becomes more significant when we’re working with larger amounts.
For example, on farmland worth $1,000,000:
- At a 2.17% rental return, you’d generate approximately $21,700 annually.
- At a 3.70% dividend yield, you’d generate approximately $37,000 annually.
That’s a difference of $15,300 per year.
We also need to account for property taxes. If your farmland generates $130 per acre in rental income, what are you actually keeping after paying those taxes?
To calculate your net rental return, subtract your annual property taxes and other ownership expenses from your rental income, then divide that amount by the current value of your farmland.
But rental income is only half the equation.
What About Farmland Appreciation?
One of the biggest benefits of owning farmland has historically been its appreciation over time.
According to historical data from Farm Credit Canada’s Farmland Values Report, Manitoba farmland increased in value at an average annual rate of approximately 5.57% between 1986 and 2018.
That’s a substantial amount of growth, especially when combined with the rental income you’re collecting along the way.
Let’s compare that appreciation with our other investments.
GICs and Savings Accounts
Unlike farmland, GICs and savings accounts don’t generally appreciate in value. Their return comes from the interest they pay.
In our example, that’s 2.50% per year.
Stocks
Rather than cherry-picking an individual stock, let’s compare farmland with the overall Canadian stock market.
Between 1986 and 2018, the S&P/TSX index appreciated at an average annual rate of approximately 6.11%, based on the historical figures used in this example.
That’s slightly higher than farmland’s 5.57% average annual appreciation.
However, stock investors may also receive dividends, which you should include when comparing total returns.
Comparing the Total Return
Now let’s combine the rental income and appreciation to get a better picture of farmland’s historical return.
Using our assumptions:
- Rental income: 2.17% annually
- Farmland appreciation: 5.57% annually
- Combined return: Approximately 7.74% annually
That’s considerably higher than the 2.50% return from our GIC example.
What about stocks?
If we combine the Canadian stock market’s historical appreciation of 6.11% with an assumed dividend yield of approximately 3%, the total return would be around 9.11% annually.
Based on these assumptions, stocks would have generated a higher return than farmland.
However, a portfolio invested entirely in stocks isn’t for the faint of heart. The value of your investments can fluctuate substantially from year to year.
Historically, farmland has offered a different investment experience, although its value can still decline and it isn’t as easy to sell as publicly traded stocks.
It’s also important to remember that these are illustrative comparisons using historical figures and assumed yields, not projections of what investors should expect today.
Other Considerations
Investment returns aren’t the only thing to consider when deciding whether to keep or sell farmland.
For example, property taxes reduce your net rental income, while other ownership expenses can also affect your return.
On the positive side, some farmland owners may qualify for preferential tax treatment when selling qualifying farm property, including the lifetime capital gains exemption.
That can make a significant difference to the after-tax proceeds of a sale.
However, eligibility depends on your personal circumstances and the property’s history, so it’s important to review the tax consequences before making a decision.
You should also consider how easily you can access your money.
If you need additional retirement income, you can’t simply sell a few acres of farmland every month to cover your expenses. With an investment portfolio, you generally have more flexibility to withdraw funds as needed.
So, Is Farmland a Good Investment?
It depends on what you’re trying to accomplish.
If you’re retired and looking to generate enough income to fund your lifestyle, farmland’s relatively low rental yield could make other investments more attractive.
On the other hand, if you’re investing for the long term, don’t need substantial annual cash flow, and are comfortable holding an asset that isn’t easily sold, farmland may be a good fit.
There’s also the question of whether you should be buying or selling farmland today.
Your guess is as good as mine.
With so many factors affecting rental income and farmland appreciation, it would be irresponsible for me to speculate about where farmland prices are heading.
Ultimately, whether farmland is a good investment comes down to your personal goals, your income needs, and what you’re trying to accomplish financially.
