Last year, many farmers like John Shea, a Wisconsin dairy producer, ventured into a new territory by investing in off-farm real estate. Shea, seeking to diversify his portfolio and generate passive income, decided to explore alternative investments beyond farmland.
Farming has been Shea’s lifelong passion, but as he approaches retirement age, he recognizes the need to manage capital differently. “I wanted to invest in something that feels real — like real estate,” he explains. However, investing in stocks made him uncomfortable, so he turned to alternative assets.
Shea found guidance in Mike Downey, co-owner of Next Gen Ag Advocates and founder of Farm Raised Capital. Downey’s organizations focus on transition planning and support non-family successors in diversifying their investments. They identify underperforming properties, such as apartment complexes, and assist farmer-investors in becoming limited partners, providing them with steady monthly income and cash distributions.
Investing in off-farm real estate offers several advantages. For young farmers struggling to accumulate funds for farmland purchases, syndicated real estate presents an opportunity to achieve higher returns comparatively quickly, albeit with certain risks. Additionally, commercial real estate offers tax benefits through depreciation, unlike farmland.
This kind of investment could be a game-changer for farmers looking to transition out of the business while avoiding the burden of deferred taxes. Many farmers face income tax problems rather than estate tax issues once deductions are lost. Alternative investments, like off-farm real estate, provide a solution to this challenge.
How does it work? A cost segregation study is conducted by tax professionals or engineers, evaluating the depreciable value of various components. For farmland, this includes fences, tile, buildings, and even fertility, while commercial real estate focuses on aspects such as pools, parking structures, appliances, and the buildings themselves. Farmers interested in alternative investments can leverage relationships with real estate syndicators, who critically analyze properties and handle due diligence, allowing passive investors to save time.
Investors typically participate as limited partners in a syndicated investment, pooling their funds together. Investment minimums can be as low as $25,000, providing accessibility to a wide range of investors. However, it’s important to consider that capital remains tied up for a predetermined period, and returns are not guaranteed.
Ultimately, alternative investments may or may not align with individual financial goals. It is crucial to assess factors such as potential upside value, local economy, and comparable rents before making investment decisions. Nevertheless, for farmers like Shea, these alternative investments offer a passive income stream without requiring excessive time away from their farms and families.
1. What is an alternative investment?
Alternative investments are non-traditional assets that vary from conventional investments like stocks and bonds. Examples include real estate, commodities, hedge funds, private equity, and venture capital.
2. What are the advantages of investing in off-farm real estate?
Investing in off-farm real estate provides potential for higher returns compared to farmland, offers tax benefits through depreciation, and diversifies farmers’ investment portfolios.
3. How can farmers invest in off-farm real estate?
Farmers can invest in off-farm real estate by becoming limited partners in syndicated investments. They pool funds together with other investors and benefit from the expertise of real estate syndicators who handle property analysis and due diligence.
4. Are there any downsides to investing in off-farm real estate?
Investments in off-farm real estate require capital to be tied up for a predetermined period and come with inherent risks. Returns are not guaranteed, and investors should carefully evaluate each opportunity to ensure it aligns with their financial goals.
5. How does investing in off-farm real estate benefit farmers transitioning out of the business?
Alternative investments provide a way for farmers to generate passive income and avoid income tax problems that may arise from losing deductions after transitioning out of farming. They can help make the transition to the next generation smoother and faster.