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AcreTrader Review: My Investment in Cash-Flowing Farmland

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AcreTrader Review My Investment in Cash-Flowing Farmland

Today’s Classic is republished from The Physician on Fire. You can see the original here.

Enjoy!


 

In 2019, I made my first farmland investment via AcreTrader, an agricultural investing platform, and I’ve now had a couple of years of experience with the company to aid in writing this AcreTrader review.

I grew up in a small farming community in southern Minnesota, and several of my friends lived on farms. I got to enjoy the freshest sweet corn every summer, hayrides and big bonfires in the fall, and those farm kids contributed to one great wrestling team in high school.

I was never cut out to be a farmer, though. I wasn’t much of a wrestler, either.

I do, however, know the benefits that we all reap every day from the hard work that farmers do and the fertile soils that they tend to.

I’ve known that agriculture can be a profitable and reliable business, but until recently, I didn’t know of a good way to participate as an investor in the field (pun intended). AcreTrader has changed that, making it simple for accredited investors to own a piece of a crop-producing, cash-flowing farm without getting their hands dirty.

 

An AcreTrader Review

The Jumpstart Our Business Startups (JOBS) Act of 2012 gave millions of Americans access to investments previously available only to institutional investors.

Title III of the JOBS Act, known as the CROWDFUND Act, went into effect in 2016, allowing for the creation of crowdfunded real estate investing platforms like AcreTrader.

The company was founded in 2018 by CEO Carter Malloy, but the seeds go much further back. Carter, whom I had the pleasure of meeting at a conference in 2019, grew up in a farming family in Arkansas, but he took a different path, earning a degree in physics and eventually joining a large private investment bank as an equity research analyst.

With AcreTrader, he is returning to his roots while using his experience in the world of finance to invest only in top-performing farms and farmland. His company does due diligence to separate the wheat from the chaff on every potential investment, rejecting > 99% of them, with only the cream of the crop offered up to potential investors.

AcreTrader’s COO, Garrott McClintock, has a similar background. He grew up as part of the 5th generation on the family farm in the Mississippi delta. After graduating from college, he worked with a value-oriented investment firm before joining Oxbow Agriculture, where he co-managed farmland with $40 Million in annual revenue.

AcreTrader’s mission is to identify farmland that can be obtained at an excellent value, rent the land to local farmers, and work with them to improve soil sustainability and output. Allowing investors to participate in the funding of these acquisitions allows AcreTrader to grow their collection of farms more rapidly, avoid taking on any debt for the transactions in most cases, and it gives investors an opportunity to benefit from both the rents collected and the likely appreciation of the value of the land itself.

Most farms will be held by AcreTrader anywhere from 3 to 10 years (a range will be given for each investment) while implementing or continuing modern, sustainable farming practices. The land will then presumably (but not guaranteed) be sold at a profit.

Why Invest in Farmland?

People gotta eat!

If it weren’t for farmers and farmland, I wouldn’t be able throw down on some Triscuits and cheese, Cobb salad, or a sirloin steak. I could probably cobble some sort of salad together with a garden and a green thumb, and I’ve managed to grow some hops at home, but modern agriculture makes it infinitely easier to enjoy an incredible variety of foods ’til the cows come home.

Besides the obvious fact that farms produce food and you eat food, there is some historical data that farmland has been a strong investment with relatively low volatility and strong returns.

Since 1990, farmland has produced, on average, a total return of 11.5%, and has done so with lower volatility than other asset classes offering double digit returns.

AcreTrader would rather underpromise and overdeliver, and most investments offered suggest a total average annual return in the 7% to 10% range.

While you’re not likely to see the 20% and higher IRR that some crowdfunded real estate investment opportunities have returned, I personally see a lower risk with farmland.

In most deals, no leverage is used in the purchases of the farms on the AcreTrader platform. The investor’s gains come from rent paid and price appreciation of the property. This model is very similar to that used by Republic Real Estate (formerly Compound) when they invest in condominium properties.

Compare this model to a typical real estate investment that uses leverage (i.e. debt) to purchase a property. If an equity investment uses 60% to 70% leverage (which is typical) and the value of the property drops 30% to 40% (atypical but possible — see 2008), a $10,000 investment in that property would now be worth $0.

An unlevered property that is purchased with 100% cash, on the other hand, would not be a complete loss for the investor after a 30% to 40% drop in value. I’ll also point out that such a decline would seem less likely with farmland that has passed strict due diligence as opposed to residential or commercial real estate, but even so, a $10,000 investment in this scenario would be worth $6,000 to $7,000 after a 30% to 40% drop in value.

Adding farmland as part of your real estate investing or alternative asset class is another way to further diversify your investment portfolio. As compared with investments in the stock market or “recession-proof” investments like gold, farmland has held its value quite well over time.

As Mark Twain purportedly said, “Buy land. They’re not making it anymore.” Farmland is, indeed, in short supply worldwide.

How AcreTrader Makes Money

While the founders are dedicated to efficient modern farming and allowing others to profit from their efforts, they also expect to profit themselves. They gotta eat, too!

AcreTrader acts as the real estate brokerage when they buy and sell farmland, profiting from the 5% or so in transaction fees. Again, this is consistent with the Republic Real Estate model.

The individual investor pays a 0.75% to 1% annual management fee, and closing costs of up to 2% when a property is purchased. These are higher than the fees of owning index funds, but now we’re comparing apples to almonds. I consider these fees to be very reasonable and not unlike other crowdfunded investment fees.

What you get in return is due diligence by a team of professionals, active management of the farmland, tenants to rent the land, regular reports from the farm (more on that below), accounting services, tax documents, and more.

Selecting Farms

How does AcreTrader perform due diligence on the many possible farm acquisitions they explore?

When you review current offerings, you’ll see grades assigned to each investment that can vary from a high score of A down to a low score of D. I wouldn’t expect to see a farm with an exceptionally low score offered — those would hit the cutting room floor, but those with a sub-A grade would represent a farm with more risk and potentially more reward.

The following are among the negative criteria used when evaluating a parcel of farmland:

  • Flooding in the last 10 years from an unresolved drainage problem
  • Water access problems
  • No current tenant
  • Lack of access to a maintained roadway
  • Crop delivery point more than 50 miles away
  • Presence of non-farming leases (i.e. hunting, energy)
  • Low-Activity market (fewer than 10 land sales of $100,000 or more in a 100-mile radius

Among the current and recent offerings on AcreTrader, most were A-grade, but if you scroll through the closed and fully funded listings, you will see a grade B almond farm.

My Experience with AcreTrader

Currently, AcreTrader offerings are available only to accredited investors. To qualify as such, you must have an income of $200,000 (as an individual) or $300,000 (as a couple) for the last two years or have a net worth (excluding primary home) of $1 Million or more.

In the summer of 2019, I invested in a corn and soybean farm in Des Arc, Arkansas. AcreTrader was novel, but I liked the premise, and I made my commitment to buy 20 shares, the equivalent of two acres to add to my growing collection of real estate investments.

Note that when you invest in your acreage, you are actually purchasing shares in an LLC that is set up for each farm acquired by AcreTrader. Your money first goes to escrow with North Capital Private Securities Corporation, a registered broker-dealer and a member of FINRA and SIPC.

When I invested, new offerings on the platform took weeks to become 100% funded, so my investment was in cash for the time that the investment filled and the property was closed upon. As the deal flow increases (new farmland offerings are now fully subscribed in hours or a few days), the amount of time before the capital is invested is decreasing.

The land I’m invested in was acquired in November, and I received my first cash dividend in December of 2019 and another in 2020. The distributions were in line with the 3% to 4% annualized payment — the remainder of my return is expected to come from the land appreciating in value and/or having been bought at a discount.

Farmland has done quite well over the years, and it’s no surprise that an intelligent man like Bill Gates is the nation’s largest private farmland owner.

I have received my K-1 tax reporting documents timely in February of the following year. In this particular investment, nearly 70% of the distribution I was paid was offset by “net rental real estate income (loss)”. I paid ordinary income tax on approximately 30% of the cash distribution.

Investing with AcreTrader

Prior to making my first investment with AcreTrader, I was able to view quite a bit of information about the property as an investment. Details included the location, pictures of the land, the acquisition price and other fees, anticipated rent, and gross and net yields.

 

 

 

 

AcreTrader_review_Rent

 

I’ve received a couple of updates on the farm’s progress, including a mid-season update and a year-end summary.

 

AcreTrader_Review_Midseason_Update

 

 

AcreTrader_Review_Update

 

 

Crop yields can be unpredictable from year to year, but your investment income is tied more closely to the rent paid, making the proceeds less subject to volatility. That structure offers some downside protection, while some of the investments do offer a share in the upside if crop production exceeds certain parameters.

Many of the investments I’ve seen on the platform are in typical row crops like wheat, corn, sorghum, and soybeans. However, I’ve also seen opportunities to invest in farms producing apples, melons, cherries, cotton, rice, almonds, and peanuts.

Since the holding period of any individual plot of farmland can be up to a decade, it’s too soon to say whether or not the investment will be successful for me. I will say that communication has been great, the technology makes signup and accredited investor status verification easy, and I’ve run into no issues or problems.

To see current listings and be notified in advance of future offerings, you can create an account with AcreTrader here. Note that this is a referral link, as are a number of other links in this review. This site may be compensated when you register for an account, enhancing our charitable mission.

AcreTrader is registered with the Better Business Bureau and has an A rating.

Caveats

It’s not all chlorophyll-producing sunshine and rainbows. Before considering an investment via AcreTrader, know that there are some risks.

It is a relatively new company. The concept is not new, but AcreTrader as a platform has only existed as a company since 2018, and no deals have gone full-circle.

Fortunately, AcreTrader does not own your farmland investment; the LLC formed for the purchase does. If the platform itself were to “buy the farm” or “be put out to pasture, “so to speak, the underlying entity that owns the property would remain solvent.

Right now, the shares in the various farms (or underlying LLC) are rather illiquid — that is, not easy to sell. AcreTrader plans to offer a secondary marketplace, subject to approval, later in 2020.

Also, as mentioned previously, investments on the AcreTrader platform are currently available only to those with a high income or high net worth as private placement Regulation D investments. In the future, they may offer Regulation A+ investments that all investors can participate in. I have seen investments on the platform with a minimum investment under $10,000, but most have in the $15,000 to $20,000 range. Expect those minimums to drop dramatically when non-accredited investors are allowed to participate.

Any investment that requires one to be an accredited investor should be considered high-risk. That being said, the lack of any debt used, the rejection of 99% of farms evaluated, and the fact that people love and need food are all factors that help me sleep at night.

Finally, while rent is collected monthly, investors are paid yearly. If you are in need of frequent distributions to make ends meet, look elsewhere. As an accredited investor, this should be a non-issue. If you are living paycheck-to-paycheck, an illiquid asset like this is not a suitable investment for you.

Is AcreTrader the only company offering crowdfunded farmland? No, actually. There are others, including FarmTogether, FarmFundr, and HarvestReturns. After reviewing the offerings of each, I felt most comfortable with AcreTrader, but you should know that other options exist to participate in crowdfunded farmland investing.

There are additional ways to invest in agriculture without investing in individual properties. There are REITS like LAND and FPI, and you could also invest in agricultural-based companies like John Deere & Co (DE) or Del Monte (FDP).

Learn More About AcreTrader

If you’re intrigued by the possibility of owning a small part of a working farm and benefitting from the crops it produces, I would encourage you to further explore the possibility by visiting their comprehensive learning center. The FAQ is quite thorough and will likely answer any questions you may have, as FAQs are apt to do.

If you’d like to explore another crowdfunded agriculture investment platform, you’ll enjoy this review of FarmTogether from my friend Kevin at Just Start Investing.

As an investor growing the alternative portion of my investment portfolio (to 20% of the total), I’ve been happy to add farmland as an asset class via AcreTrader.

Have you invested directly or indirectly in farmland and agriculture? Please tell us about your experience below.