Financial advisors, your clients might be missing an opportunity to diversify their individual retirement accounts into what might be the single most obvious alternative investment.
As has been well-documented in this space, self-directed IRAs are the only ERISA-qualified accounts that can hold real estate-based assets. Considering real estate is by far the most popular alternative investment -- popular enough that it makes a mockery of the modifier "alternative" -- we can assume that any professional financial advisor has already gotten up to speed about how to channel a small rental property or an LLC membership through such accounts, advising on some of the more esoteric flavors might require a little more reading. Not everyone can be an expert on everything, so private mortgages, tax lien certificates, water rights, and so on might have to wait until next year.
But what about farms? These are, after all, the original purpose of land ownership. Our species didn't give up the hunter-gatherer life to buy condos and self-storage, after all.
It’s also true, though, that many of us have spent our lives apart from -- and, let’s face it, disdainful of -- our pastoral roots. So let’s not have any romantic notions about getting back to the land. Instead, let’s see how we can participate in ownership of agricultural land to the financial advantage of ourselves and our clients.
What is it real estate agents are always saying about what drives their properties’ value? “Location! Location! Location!”
They're wrong, and they know it. While location is critical when selecting retail or office space -- or living space near shopping and work -- does it really matter to Amazon if it puts a warehouse in Clinton, N.J., or Wilton, Conn.? They're both about the same distance from midtown Manhattan.
And as far as agriculture is concerned, land is much less non-fungible. While there’s only one 30 Rockefeller Center, one acre of wheat in Kansas isn’t that much different from one acre of wheat in Nebraska.
So maybe your clients are already diversifying by geography, as well they should. Different macroeconomic factors drive Dallas-Fort Worth than drive Minneapolis-St. Paul. If they’re already diversifying by asset class, though, maybe they should be tuning their portfolios a little more finely.
Some investors parse residential real estate from commercial real estate and consider the job done. But CRE is an incredibly broad category and offers more opportunities for diversification than might already be under consideration. The next level of drill-down would be to segment it by retail, office, and warehousing. Other options include the property that houses cell towers and power lines -- a big and growing but still largely unknown category.
"Green Acres is the place to be …."
Farmland could be a good investment for a number of reasons. The first is, they’re not making any more. While our population is growing, the real estate we dedicate to feeding it is shrinking. In just the past 20 years, U.S. farming acreage declined by more than 5%.
It also checks a lot of boxes as a hedge against volatility. It barely correlates with financial markets, is rarely driven by news or events, and is intended as a long-term holding, so it diversifies in terms of time horizon as well as asset class.
And, unlike Oliver Wendall Douglas from that classic sitcom Green Acres, your clients would not have to work the land to have the land work for them.
Once the question of whether to buy farmland is answered, the next question is: “How?” Traditionally, these lots have been owned by families who are deeply attached to the property.
But that doesn’t appear to be the case anymore, at least not to the same extent.
“In the next five years, around 4 million acres of farmland a year will exchange hands in the U.S., partly driven by the generational transfer of assets,” Martin Davies, CEO of Westchester, the global agriculture arm of Nuveen, told IPE Real Assets magazine. “People that have inherited land don’t want to farm it.”
And therein lies the opportunity. Farmfolio, an international aggregator of farming properties, offers four different ways to generate passive income from agriculture:
Agricultural stocks. Think outside the barn. Sure, there are famous agribusinesses such as Archer-Daniels-Midland, but farm machinery makers like John Deere or Caterpillar are tied closely enough to farming that they can be considered proxies. Ditto for the freight companies that ship produce to market. Ditto also for the pesticide and fertilizer companies that specialize in farming inputs.
Agriculture funds. Whether exchange-traded or not, agricultural funds -- iShares MSCI Agriculture Producers ETF is probably the best-known -- are an easy way to gain exposure to farming.
Real estate investment trusts. Farm REITs buy multiple farms in different geographic areas to lease to farmers, offering greater diversification and liquidity than buying a single piece of land. That’s the pitch, at least, of such trusts as Gladstone Land and Farmland Partners.
Online Platforms. AcreTrader and FarmTogether are just a couple of the growing number of online platforms that provide individuals with direct access to farmland investment opportunities.
With the exception of non-exchange traded mutual funds and probably the online platforms -- depending on how they're regulated -- everything above is fair game for any qualified retirement plan. All of it is accessible to self-directed IRAs.
So your clients don’t have to invest in waterproof work boots to become farmers. They can just choose one or more ways to add agriculture to their retirement portfolios and leave the work to the professionals.
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