Making Passive Income With Agricultural Land
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While stocks and other types of real property may be great options for generating passive income, it's easy to overlook another tried-and-true approach: buying agricultural land.
Land, in general, is scarce and holds its value well, with land prices rising nearly 11% between 2021 and 2022. Landowners can lease their land for a variety of purposes to generate income.
Read on to learn more about some of the ways landowners can make passive income with their agricultural land.
How Do Ground Leases Work?
Agricultural landowners generate passive income mostly by leasing their land to those who seek to use it for a wide variety of reasons. With a ground lease, the owner leases their land to a renter who can then build structures on top of and develop the land as they see fit.
Land leases help both parties because they give renters access to land for development, and landowners can extract passive income out of their farmland investment.
Ground leases work differently than traditional commercial real estate leases. The typical term on a ground lease is between 50 and 99 years. Additionally, tenants assume all responsibility for operating properties and structures on the land.
Lastly, ground leases allow landlords to make money from land without having to pay capital gains taxes from selling.
What Can I Lease My Agricultural Land For?
Agricultural land is extremely flexible, so landowners can lease it for all kinds of purposes, including but not limited to those listed below.
#1 – Farming
According to a 2017 survey from the National Young Farmer's Coalition, 61% of young farmers say getting financing for land was their biggest difficulty.
As a landowner, you can lease your agricultural land to a farming operation. The result is the farmer can produce without having to buy land of their own, and you get regular rental payments in exchange.
#2 – Ranching
Instead of farming, you can lease your land to ranches for cattle grazing. Landowners can define the type and number of grazing animals that can use their land as well as what kind of plants the grazing animals can eat. Typical pasture rents are about 1% to 2% of the market value of the land.
#3 – Advertising
You can also lease your agricultural land to advertising agencies looking to place new billboards. Farmland often sits next to long stretches of busy interstates and highways, making the asset prime real estate for several forms of outdoor advertising.
#4 – Infrastructure
Another option is to lease land for various infrastructure projects, like gas lines, power cables, and cell phone communication towers. Cell tower leases, in particular, are lucrative as large providers will often pay up to $45,000 a year to lease land.
#5 – Hunting/Fishing/Recreation
Woodlands and properties near water can be leased for hunting and fishing activity. Hunters and fishers will pay top dollar to seek game on private lands.
The more diverse the wildlife on the property, the more you can charge. You can also lease the land for more general outdoor recreation, like hiking or camping.
#6 – Natural Resource Extraction
Lots of farmland is replete with natural resources, such as oil, natural gas, minerals, coal, and timber. Landowners can lease mineral rights on their land to extraction companies and receive a portion of the profits.
How Do Environmental Property Assessments Work?
When applying for a land loan, most lenders will require that you get an environmental assessment completed to determine any property contamination.
Environmental assessments look for contaminants, such as:
- Asbestos;
- Groundwater contamination;
- Radon;
- Lead;
- Petroleum pollution;
- Arsenic; and,
- Heavy metals.
Generally, the land buyer is responsible for performing an environmental assessment and must go through a remediation process to fix any contamination. It's crucial that potential buyers find a qualified environmental assessor to avoid potential legal and financial problems when buying contaminated land.
How Do Mineral Rights Work?
States typically distinguish between surface rights and mineral rights when talking about land use rights. Surface rights entitle the owner to build and develop structures on the land. Mineral rights give the owner the right to harvest minerals and other natural resources from underneath the surface.
Landowners can lease the mineral rights on their land to another entity in exchange for rent. For instance, say you discover a natural gas deposit on your farmland. You can lease the mineral rights on your land to a gas company that will pay you for the right to extract the resource.
Landowners usually assume ownership of both surface rights and mineral rights when buying agricultural land, but the two rights can sometimes come apart. When buying agricultural land for sale, it's crucial that buyers determine which rights they will assume. Otherwise, you might end up buying land and not being able to use it for your intended purposes.
How Much Is Agricultural Land Per Acre in the US?
According to the USDA 2023 land report, the average cost for an acre of agricultural land for sale in the US is approximately $4,060, up 7% from $3,800 per acre in 2022.
The average value for an acre of pasture land in 2023 was $1,760, up 7% from $1,650 in 2022. The state that saw the largest growth in land prices between 2022 and 2023 was Kansas, where land prices grew 16.3%.
Which States Have the Cheapest Land Per Acre?
The states with the most affordable commercial farmland are New Mexico, Wyoming, and Nevada, at $610, $880, and $1,080 per acre, respectively.
The states with the most expensive land prices per acre are Rhode Island, New Jersey, and Massachusetts at $18,300, $17,700, and $15,300 per acre, respectively.
The states with the least expensive pasture land are New Mexico, Wyoming, and Montana, at $480, $670, and $800 per acre.
Conversely, the most expensive pasture land is in New Jersey at $16,600. So, the cheapest state to buy farm and pasture land is New Mexico, and the most expensive state is New Jersey.
Where Is It Cheapest to Buy Farmland?
Generally speaking, the cheapest areas for buying agricultural land in the US are in the Southwest and Great Plains regions of the country.
These two areas of the nation have vast expanses of flat, rural land perfect for agricultural production, forestry, or cattle ranching. The most expensive region to buy land in the US is the Northeast and New England.
Whether you're buying land in Virginia or Idaho, consider working with a commercial land broker. Land brokers can analyze financials to identify the best candidates and help you locate leasing opportunities. Additionally, brokers are skilled at negotiating sales and lease contracts.
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