Investing in land as a hedge against inflation?

[Captain Cactus]

Hey all,

I listen to David Stein's podcast called "Money for the Rest of Us".  Great podcast...definitely worth checking out.  In the last episode he discussed asset allocations and how his strategy has shifted due to COVID-19.  Something that caught my attention was that he has invested in land as a hedge against inflation.  The property taxes (comparable to an expense ratio?) are generally low.  I thought that was very compelling.

We often hear about investing in precious metals as a hedge against inflation... anyone invest in raw land for the same reasons?

[ChpBstrd]

I've tried to make the math work on timberland, but timber prices are too low. Long-term flipping seems like greater-fool-theory investing. Buying timberland on the outskirts of cities to cut and subdivide worked for a lot of investors for a while, but this is a bold bet on a trend of increased suburbanization 20 years from now and you'll pay a lot more for land close to any development. Rural land prices in my area haven't changed much in my 20 years of watching, which is a disaster in terms of inflation. You can buy very rural timberland on a hillside for $1,500 - $2,000 / acre in much of the South.

Scenarios in which inflation occurs probably involve people having less purchasing power to buy these exurban "ranchettes" and "McMansion" that are driving land investment right now. It might also involve a weaker dollar (unless lots of other nations are competitively devaluing), which means less money from timber exports.   

Throw in closing costs, localized risks that can't be diversified, illiquidity, property taxes, the risk of timber theft, and maintenance (posting, trash clean up) and you have a high risk, low potential return investment, with no inherent certainty of inflation protection. Plus you are competing against professionals.

Speaking of, why not just buy WY, PCH, RYN, and CTT. (Note: They're all struggling)

 

[Michael in ABQ]

Raw land is probably the most volatile class of real estate. There's not a lot of cases with say an office building, single-family home, or warehouse where the price will double or be cut in half in a matter of months. That can absolutely happen with raw land depending on something like a zoning change, annexation (or lack thereof), infrastructure buildout (roads, water, electric), etc.

The value of land is dependent on what can be built on it. In recessions, there's very little building going on so the value of land for development drops precipitously. Most owners will refuse to sell at the lower market value unless forced to. That's usually dependent on if they bought it for cash or have debt on it. In my market, it was mostly the former so land prices didn't appear to drop as much. It's just that nothing sold for several years unless it was a bankruptcy. But I appraised land that had dropped to 30-40% of it's pre-recession value. In one industrial park there was a lot of speculating going on and land went from $3/SF in the early 2000s up to $6/SF in 06-07 and then dropped down to $2-3/SF in 2012-2013 when it finally started selling again as users came back into the market - not just speculators.

If it's agricultural income producing land that's a different story. Still, returns are generally in the low single digits for agricultural land and appreciation is linked to larger trends like the price of corn or soybeans. Not to mention, you're competing against users who will usually be willing to pay more than just passive investors.

If you want to buy some cheap land in the path of development and wait 20 years - you'll probably find you could have made more simply investing in an index fund.

[maizefolk]

If it's agricultural income producing land that's a different story. Still, returns are generally in the low single digits for agricultural land and appreciation is linked to larger trends like the price of corn or soybeans. Not to mention, you're competing against users who will usually be willing to pay more than just passive investors.

If I was investing in land as a hedge against inflation I would definitely go with crop land. Need to find a reliably tenant who will work it in a way that doesn't destroy its value, but if you do rent would more than cover property taxes.

Right now cropland is still priced quite high as a result of the runup in prices from the spike in crop prices back in ~2012.* Crop prices have come down a lot, but land prices are much stickier. Farm bankrupcies are continuing to increase this year though, land may come down as a result, although it is a heartbreaking reason why.

 Until then, ag land is similar to the situation ChpBstrd describes for timberland: in principle should be a good uncorrelated investment that is robust to inflation, but the expected return is just too low.

*Which also contributed in a large way to the arab spring, but that's an unrelated point.

[Wolfpack Mustachian]

Just to echo what others have said, this seems like a lot of fortune telling would be required. You could certainly hit it, but it's a gamble imo.

[Fishindude]

We own several farms.   Some of our ground is in crop production and some is in various paying CRP and wildlife habitat programs.   All of the ground is paid for, purchased with cash and we average a 3-4% return after any property taxes and expenses.   It's a real nice pert of our retirement income.

Appreciation in value is slow with farm ground, but hang onto it long enough and you will do okay.   The first place we purchased in 1990 at $750 per acre is now easily worth $6,000 per acre.   It's easy to sell and turn back into cash also if you need to, with little chance you will lose money.

Considering my mutual fund investments are down below where they started at the beginning of the year, the farm ground looks like a pretty smart investment.
We'll buy another one if the right opportunity comes along.   I think income producing real estate should be part of everyone's portfolio.

[vand]

I think there must be easier ways to hedge against inflation for the retail investor..

Personally I am building a position in Wisdomtree's broad commodities AIGC.L ETF to go alongside my holdings in precious metals. It's designed to track the Bloomberg commodities index and seems to do so very well. Not sure if it's available to US investors.. if not I'm sure there's something similar.

I also hold plenty of gold miners and commodity shares.

standard disclaimers: this is just what I am comfortable doing, not investment advice

[Michael in ABQ]

We own several farms.   Some of our ground is in crop production and some is in various paying CRP and wildlife habitat programs.   All of the ground is paid for, purchased with cash and we average a 3-4% return after any property taxes and expenses.   It's a real nice pert of our retirement income.

Appreciation in value is slow with farm ground, but hang onto it long enough and you will do okay.   The first place we purchased in 1990 at $750 per acre is now easily worth $6,000 per acre.   It's easy to sell and turn back into cash also if you need to, with little chance you will lose money.

Considering my mutual fund investments are down below where they started at the beginning of the year, the farm ground looks like a pretty smart investment.
We'll buy another one if the right opportunity comes along.   I think income producing real estate should be part of everyone's portfolio.

Solid 7.2% annual return over 30 years, and presumably a couple percent more with ground rent after expenses. Matches or beats the S&P 500 at 9.7%.

My dad bought an 80-acre farm back in the 70s or 80s for a few thousand dollars and sold it a year or two ago for about $50,000. However, it barely made money with a wheat crop that he paid a neighbor to farm.

[HeadedWest2029]

I grew up on a farm and still own farmland (corn & soybeans).  My cash rent yield is pretty low because I rent it out to family, but generally speaking over the last 50 years you could expect something in the neighborhood of 5% rent and 5% price appreciation over the long term for high productivity land.  Direct ownership is very competitive though.  It tends to get passed down from generation to generation or bought up by big mega-farmers.  Like most non publicly traded assets the volatility is hidden because you don't have a daily ticker showing price fluctuations, but I'm under no illusion that it's not risky. Yet it definitely feels nice psychologically to have it in the portfolio for diversification that is relatively uncorrelated to the stock market.  Other than the early 80's and more recently around 2013, land prices have done nothing but go up.  They still haven't totally rebounded from the 2013 high (which was a confluence of events creating a perfect storm for a price spike). 

There are crowdfunding options like Farm Together.  Meb Faber interviewed him here https://mebfaber.com/2020/04/27/episode-215-david-chan-how-do-we-make-farmland-as-an-asset-class-more-accessible/

There's also Farmland Partners, which is a publicly traded company (ticker is FPI).  I've heard very mixed things on them so it's not for me, but in case you want to investigate that as an option

[Captain Cactus]

I believe what Stein was suggesting is that there's value in holding raw land as a hedge against inflation, and one way (of several ways shared) to hold wealth not directly linked to the US dollar.   The idea being that if the US dollar were to be devalued somehow, the land would still retain value in the sense that it can be used to farm, build upon, live on, etc... not so much that it's a good investment when compared to VTSAX, etc... 

[Captain Cactus]

As an aside, cracks me up (in a sad, depressing kind of way) how low land prices are down south or out west.  I live in Connecticut and your basic 1 acre house plot can go for more than $75,000.  Make that land along the lake, river, ocean?  Hundreds of thousands of dollars, or more. 

There is something very appealing about owning a chunk of land as a small part of a diversified portfolio.  Even if it doesn't go up dramatically compared to the S&P 500, it's tangible and relatively cheap to hold (if purchased outright vs financed).

[bigblock440]

As an aside, cracks me up (in a sad, depressing kind of way) how low land prices are down south or out west.  I live in Connecticut and your basic 1 acre house plot can go for more than $75,000.  Make that land along the lake, river, ocean?  Hundreds of thousands of dollars, or more. 

My first thought was $75k for a house on 1 acre is fairly reasonable.  Then I realized you meant bare land.

[Captain Cactus]

As an aside, cracks me up (in a sad, depressing kind of way) how low land prices are down south or out west.  I live in Connecticut and your basic 1 acre house plot can go for more than $75,000.  Make that land along the lake, river, ocean?  Hundreds of thousands of dollars, or more. 

My first thought was $75k for a house on 1 acre is fairly reasonable.  Then I realized you meant bare land.

I know!  I listen to these podcasts and the FI Gurus are talking about buying their buy and hold real estate, buying houses at $30K, $50K, etc... these amounts are minimum down payments in Connecticut!  Drives me nuts!

[celerystalks]

As an aside, cracks me up (in a sad, depressing kind of way) how low land prices are down south or out west.  I live in Connecticut and your basic 1 acre house plot can go for more than $75,000.  Make that land along the lake, river, ocean?  Hundreds of thousands of dollars, or more. 

There is something very appealing about owning a chunk of land as a small part of a diversified portfolio.  Even if it doesn't go up dramatically compared to the S&P 500, it's tangible and relatively cheap to hold (if purchased outright vs financed).

The three most important things when it comes to real estate:
1. Location
2. Location
3. Location

[ChpBstrd]

As an aside, cracks me up (in a sad, depressing kind of way) how low land prices are down south or out west.  I live in Connecticut and your basic 1 acre house plot can go for more than $75,000.  Make that land along the lake, river, ocean?  Hundreds of thousands of dollars, or more. 

My first thought was $75k for a house on 1 acre is fairly reasonable.  Then I realized you meant bare land.

I know!  I listen to these podcasts and the FI Gurus are talking about buying their buy and hold real estate, buying houses at $30K, $50K, etc... these amounts are minimum down payments in Connecticut!  Drives me nuts!

Arguably, coastal state real estate is in a bubble. The difference is prices is not explainable by the higher salaries on the coasts, lower taxes, or any rational reason. Perhaps the best real estate move is one of avoidance.

[maizefolk]

Arguably, coastal state real estate is in a bubble. The difference is prices is not explainable by the higher salaries on the coasts, lower taxes, or any rational reason. Perhaps the best real estate move is one of avoidance.

I think a big part of it is more restrictive zoning laws, greater difficulty in getting a building permit approved, and in places like manhattan and SF, physical restrictions on the growth of the city (being partially or completely surrounded by water). Combine that with a sharp decline in rates of interstate migration (people aren't able or willing to move out of state if housing is too expensive in state) and you have a recipe for demand for housing in those coastal cities growing a lot faster than supply.

[bthewalls]

Hey all,

I listen to David Stein's podcast called "Money for the Rest of Us".  Great podcast...definitely worth checking out.  In the last episode he discussed asset allocations and how his strategy has shifted due to COVID-19.  Something that caught my attention was that he has invested in land as a hedge against inflation.  The property taxes (comparable to an expense ratio?) are generally low.  I thought that was very compelling.

We often hear about investing in precious metals as a hedge against inflation... anyone invest in raw land for the same reasons?

I work in this area..

Land can become quite worthless if planning zoning and restrictions change severely...tread carefully

[Wolfpack Mustachian]

I just have to say, you guys are doing amazingly well on land compared to what I'm used to. Where I'm at, renting out for farming barely covers the cost of taxes, and getting 3, 4, 5% appreciation is pretty dang impressive.

[maizefolk]

I just have to say, you guys are doing amazingly well on land compared to what I'm used to. Where I'm at, renting out for farming barely covers the cost of taxes, and getting 3, 4, 5% appreciation is pretty dang impressive.

How long have you been renting out the land? Appreciation in farmland doesn't come at a constant 3-5%/year but in big surges followed by modest pullbacks and stagnation so depending on how long you've been doing it, you may not have one of those big surges in your numbers yet.

[Fishindude]

I just have to say, you guys are doing amazingly well on land compared to what I'm used to. Where I'm at, renting out for farming barely covers the cost of taxes, and getting 3, 4, 5% appreciation is pretty dang impressive.

I'm getting $180 per acre for my corn & bean ground.   Some of our habitat projects pay as high as $290 per acre.
You can get $225-250 cash rent per acre for the really good corn & bean ground in my area.
We also sell off some timber every 15 years or so for a nice little windfall.   Could easily pick up another $20 per acre for hunting lease rights if we didn't hunt the place ourselves.

[Wolfpack Mustachian]

Interesting statistics and advice, thanks! It's given me something to ponder on.