Iowa Farmland As An Investment
Farmland Real estate has two components when considering its return potential: cash operating returns and future changes in value. Different land types will have differing relationships between these two components. Land with development potential may have very low cash returns but may have greater appreciation potential when development arrives. Highly improved properties may have higher cash returns, but may depreciate in value over time.
During the 20th century, Iowa farmland generally experienced returns that were relatively similar on both sides of the scale. Cash operating returns were usually slightly higher than annual appreciation in value. From 1900 to 1999, the average value of Iowa farmland appreciated at 3.8% per year.
Since 2000 and especially since 2006, Iowa farmland has appreciated at much faster rates. The average rate of appreciation from 2000 to 2011 (using Iowa State University Land Value Survey averages) was 12.4%, while the average annual increase from 2006 to 2011 was 15.9%. Land value appreciation has been heavily influenced by dramatically improved returns to crop farming, particularly since 2006. The anticipation of higher returns and lack of confidence in other investments has made farmland a very attractive investment for farmers and non-farmers alike. Very low interest rates lower the return on funds sitting in “safe” investments and also cheapen the cost of borrowing. That being said, current lending practices are stringent and land purchases are not being over-leveraged.
Cash returns will depend on land quality, lease type, location, and other factors; however, annual cash operating returns of 4% to 7% of current value can be expected. As land values appreciate, operating returns should maintain a historical price-to-earnings ratio. Therefore, as a long-term investment, cash operating returns should keep up with inflation as the asset appreciates in value.
Historical change in land value can be easily tracked with the well-known Iowa State Land Value Survey, which is published each December with values as of each November 1st. There were 22 years in the past century when land values decreased and 78 years when values increased or held steady. Periods of major land value changes included price spikes during WWI to 1920, the inflation-fueled 1970’s, and recently as noted above. Major declines in land values occurred from 1921 to 1933 as land values dropped post-WWI into the Great Depression, and from 1981 to 1986 when prime interest rates hit 21.5% and remained in double digits for most of that decade.
Considering the historical performance of rising land values and relatively consistent cash returns, Iowa farmland is an excellent place to build and store wealth.