What Should a Family Consider Before Buying Farmland as an Investment?

Before buying farmland, assess the property and the work required to own it well. Land can be a long-term holding, but the family needs a clear view of how it will produce income or appreciate, who will manage it, and how it fits with the rest of the portfolio.

Study the Land and the Operating Plan

Review the property's location, access, condition, water resources and intended use. Establish who will operate the land and what skills or local relationships the work requires. If income depends on a tenant, operator or crop plan, understand the assumptions behind that income and how the family will monitor results.

Separate the investment case from any personal or family connection to the property. The family should be able to describe what would make the purchase successful and what could impair that outcome. Include ongoing costs, capital improvements and debt service. Account for the possibility that income will not arrive as planned.

Look Beyond One Property or Market

Concentration matters. In The Single Family Office, I describe how investors with too much exposure to one property market were hurt when that local market fell and refinancing became difficult. Farmland can create similar concentration if a family's holdings depend on one region, crop or source of operating income. Review total real estate exposure, including assets held through entities and funds.

Compare direct ownership with a fund or partnership that may provide operating expertise and spread exposure across properties. Direct ownership can give the family more control, while a fund adds manager oversight and its own terms, costs and liquidity limits. The direct ownership and fund comparison offers a useful framework.

Plan for Financing, Liquidity, and Tax

Estimate the cash needed to buy and improve the property, along with ongoing maintenance. Stress the plan for lower income, higher costs, delayed refinancing or a longer holding period. Do not count on a sale to fund near-term spending unless the family has a credible buyer path and a backup source of liquidity. Use the capital call and liquidity planner to map this asset against other commitments.

Review borrowing terms and understand how debt affects the family's ability to hold through a difficult period. A property with a long operating horizon can become fragile if financing requires cash at the wrong time. The family should also consider ownership structure and applicable local rules. Talk with your attorney and CPA about legal and tax specifics, including any cross-border issues if the property is outside the family's home jurisdiction.

Document the reason for buying and who will operate the land. Set conditions that would prompt a review. Farmland can fit a family plan when ownership and operating demands are understood and the capital can remain committed for as long as needed.

Read next: How should a family plan for assets that may take years to sell?

Investors with a balanced portfolio of different asset allocations and real estate holdings in different cities and markets are less likely to fall victim to the collapse of one city's overheated property market.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.