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Tips for investing in farm land

There's no doubt about the direction of farm land prices. But, the land market has a mind of its own and "its own set of rules," making investing a whole different ballgame.

Few assets in the world have performed as well as U.S. farm land over the last few years. Year-over-year value gains hovering around 20%, though, won't last forever. That doesn't mean there isn't fundamental support at those levels right now, says Murray Wise, farm real estate expert with Murray Wise Associates, LLC.

"I can't tell you whether the price of farmland will go up next year. I think we all realize that no asset can continue to rise 18% to 20% indefinitely," he says. "But that has little or nothing to do with its value at current prices. And from a value standpoint, there's no doubt that today's prices are well justified."

But, the current numbers make the land market a "haven" for investment dollars that would be destined for other arenas if conditions were different. That is changing the ownership landscape, and not always for the better.

"Investors who've never even considered buying a farm are now turning to agriculture as a haven that has provided consistent, strong long-term gains without the volatility of stocks or even other forms of real estate," according to Wise. "But with that newfound popularity comes a new challenge: Making sure investors understand enough about agriculture to make smart decisions."

Whether you're a farmer working with an investor who's not as familiar with the farm land market, or you're an investor yourself, Wise offers this advice.

  • Think long term. "Farmland is more liquid than a lot of people realize, especially today. But it still should be considered a long term investment. On the other hand, you don't have to worry about the price tanking because of a negative earnings report. It's all about steady growth and consistent, attractive returns."

  • Look for value. "The market for farmland, like most others, can be inefficient. Prices have increased 20 percent or more in Illinois, Indiana and Iowa during the past year. But they're only up 12 percent in Michigan and 8 percent in Wisconsin. There are still a lot of great values out there."

  • Don't be afraid to sell. "Even farmland isn't forever. There are situations in which it makes sense to sell -- either to rebalance a portfolio or to assure the inheritance of the next generation, for example. For those, it makes good sense to sell into strength. While we sell at auction as well as in private treaty transactions, we find that an auction tends to create the competition that brings the highest price."

  • Understand what you're buying. "While the media's focus right now is on price appreciation, investors need to make sure they are in a position to realize the income streams. That means you need a basic grasp of the various options for leasing the land. In most cases, cash rents are at levels the can provide a steady return of 4 percent, plus appreciation."

  • Get good advice. "This is one investment class in which it really pays to find an adviser or buyer representative who understands the marketplace and can help you find land that suits your investment objectives, as well as one who will assist you with leasing the land."

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