One of the most important parts of building a successful investment portfolio is diversification. Holding a mixture of different assets, like stocks, bonds, and real estate can help you reduce volatility. If one asset does poorly, another type might perform well and offset the losses.
Real estate investing can be very complex. Investing in real estate can be difficult without the help of vehicles such as real estate investment trusts (REITs). Even then, there are many different types of real estate you can invest in.
AcreTrader is a company that helps everyday people invest in an often-overlooked type of real estate: farmland.
What Is AcreTrader?
AcreTrader is a company that facilitates investments in American farmland. Traditionally, farmland investments have been difficult for the average investor to make, so AcreTrader aims to make the process easier.
The company has a team that combines experience in both agriculture and finance. The company carefully selects the opportunities it offers to investors and claims that it only selects 1% of the investment opportunities it sees.
AcreTrader also handles the management of these investments, paying out rental income and facilitating a marketplace where investors can sell their shares to others interested in buying farmland.
Key Features of AcreTrader
There are a few key facts to know about AcreTrader.
For many investors, it can be difficult to do due diligence when investing in real estate. Several factors influence the value of real estate and its potential returns, and farmland is unique enough that most people don’t know what to consider when thinking about an investment.
AcreTrader offers help with this through its underwriting process. The company only accepts 1% of the opportunities it receives from farm owners, based on the research and knowledge of its leadership.
AcreTrader displays investment opportunities for customers to consider. It also assigns a rating to each opportunity based on its risk and potential return according to AcreTrader’s vetting process. Investors can see the expected cash return, the overall expected return, the location of the farm, and the crops that will be grown.
By only accepting the best opportunities, AcreTrader hopes to provide strong returns and limit risks for investors.
Buying in Small Amounts
AcreTrader places each farm it buys into a limited liability company. It then divides the farm into shares representing one-tenth of an acre. That makes it easy for investors to invest the exact amount that they want.
Keep in mind that each offering has a minimum investment based on the size of the farm. The minimums tend to range from $15,000 to $20,000.
AcreTrader is only open to accredited investors, meaning people with an annual income of $200,000 or more ($300,000 for couples) or a net worth exceeding $1 million. That makes the $15,000 to $20,000 minimum relatively reasonable for its intended audience.
Multiple Sources of Return
Once an investment offering is fully subscribed, AcreTrader takes over the management of the farm. It works with professionals in agriculture and local farmers to help improve farm value through:
- Sustainability improvements
- Implementing best practices
- Technological improvements
- Capital investment
The farmers working the land also pay rent to AcreTrader annually. AcreTrader charges an annual fee of 0.75% of the land value to its investors, taken out of the rent income it pays out to the investors.
AcreTrader states that it typically looks for opportunities that will yield 3% to 5% after fees and capital appreciation sufficient to result in an internal rate of return of 7% to 9%.
Trade Shares or Hold Until Maturity
Investors on AcreTrader have two options for earning a return when they invest in farmland.
It operates a marketplace where its customers can sell shares to other investors. Customers can only sell AcreTrader shares through AcreTrader; they cannot sell them on the open market. This can make the shares far less liquid than the securities many people are used to, which trade frequently on the open market.
For people who don’t want to sell or who cannot find a buyer, AcreTrader investments come with a maturity date. When AcreTrader buys a property, it typically intends to hold it for three to five years, although sometimes the time frame extends as long as 10 years. This gives the company’s team time to make improvements to the land and the methods used to farm it, increasing its value.
Once the investment’s end date arrives, AcreTrader sells the farm and distributes the proceeds to the shareholders.
AcreTrader charges a simple 0.75% fee for its investments, based on the value of the underlying farmland. Investors don’t pay the fees out of pocket. Instead, the company deducts the cost of managing the investment from the rent payments it receives from farmers. It passes the remainder on to investors as annual distributions.
Some opportunities may also come with closing costs associated with purchasing the land.
The 0.75% annual fee is relatively typical for companies that facilitate real estate investments.
How Have Farmland Investments Fared in the Past?
Past performance doesn’t indicate future results, but looking at how farmland investment performed in the past can provide some information to investors.
AcreTrader claims that since 1990, farmland has been one of the best-performing assets in the United States, outpacing the returns offered by stocks, bonds, precious metals, and traditional real estate. According to the company, an investment of $10,000 made in 1990 would now be worth nearly $200,000.
Much of this growth came from a recovery in the market for farmland following a crash that saw prices fall from a high in the early 1980s, as well as a boom in the late 2000s caused by increasing demand for ethanol.
Inflation-adjusted, farmland saw little change in value between 1900 and the 1960s, until the boom that began in the late 1960s and early 1970s.
Keep in mind that part of AcreTrader’s value proposition is improving the operating of the farms it purchases. The company’s team includes people highly experienced with agricultural best practices and technology. Even if farmland as an asset class holds steady or falls in value, AcreTrader may manage to increase the value of the specific properties it buys through the improvements it implements.
The promise of distributions from the rent AcreTrader receives also helps to offset the risk of falling or stagnant land values.
All in all, that means that is certainly potential for farmland to be a successful investment, but there’s no guarantee it will offer significant returns or outperform other asset classes.
AcreTrader brings a few important benefits to the table.
1. Access to a Unique Asset Class
One of the primary benefits of investing through AcreTrader is access to investments in farmland. Farmland is a relatively unique asset class. It can be hard to get exposure to it through more traditional channels.
That means AcreTrader provides a unique opportunity to diversify your portfolio and capture gains most people don’t have access to.
2. Carefully Selected Offerings
AcreTrader touts its team’s combined experience in the worlds of both agriculture and finance. The company says it only accepts 1% of the opportunities that are presented because it has strict requirements that ensure the investments available through its site are of the highest quality.
If you believe in the expertise of AcreTrader’s management team, you can feel confident that you’re investing in high-quality farmland that has great potential to produce income and grow in value.
3. Annual Cash Payments
AcreTrader offers returns in two forms: cash from the rental payments made by farmers working the land AcreTrader owns, and land appreciation created by the investments AcreTrader makes into updating the farms it purchases.
The regular cash payments can help smooth out returns if farmland fluctuates in value. It can also provide a stream of income investors can use to add to their portfolio or cover other expenses.
AcreTrader isn’t perfect, and it’s important to know the drawbacks before you start investing.
1. Relatively Unproven
AcreTrader was founded in 2018, which means the company has only been around for a few years. While the company is reputable, it doesn’t have the long track record of producing a positive return that other investment companies have.
It also means the company doesn’t have significant experience handling changing market conditions, which could increase risk during market turbulence.
2. Potentially Low Liquidity
When you buy shares in a farm through AcreTrader, it may be difficult to sell those shares to other investors. With traditional investments like stocks, bonds, and mutual funds, you can generally sell your investment on demand. This is important if you need to access your funds because of a financial crisis.
On AcreTrader, you can only sell your shares to other AcreTrader users. AcreTrader restricts investment to accredited investors, which limits the number of people who can join the platform. That means there’s no guarantee you’ll find someone who wants to buy the shares you’re selling.
If you need your money back, you might find yourself having to wait five to 10 years for AcreTrader to liquidate the investment and distribute the proceeds to investors.
3. Available to Accredited Investors Only
AcreTrader is only open to accredited investors. To qualify as an accredited investor, you must meet one of the following requirements:
- Have an individual or joint (with a spouse) net worth exceeding $1 million, excluding your primary residence
- Have an individual income exceeding $200,000 per year and a reasonable expectation of the same level of income in the current year
- Have a joint income (with a spouse) exceeding $300,000 per year and a reasonable expectation of the same level of income in the current year
According to 2016 Federal Reserve data, only about 10% of households qualified as accredited investors, which means the majority of people cannot invest through AcreTrader.
AcreTrader offers exposure to an unusual and potentially lucrative asset class for investors with sufficient net worth or income to qualify. The company helps with due diligence by only offering the best opportunities it comes across, but further research should be part of every individual’s investing process.
If you can’t invest through AcreTrader, or you’d prefer to invest in real estate through more traditional means, REITs provide an easy way to invest in different kinds of real estate while letting you use your regular brokerage account. You can also look into other real estate crowdfunding sites and investment platforms.
Have you tried investing in real estate? Do you own unusual real estate investments? How have they performed for you?