Is Buying Land A Good Investment In 2023?
Investing in these uncertain times can be stressful. With inflation and a looming recession, the market and economy are facing some challenges. While traditional investments, like stocks and bonds are an unsure bet, land investment is a great way to safeguard and preserve wealth over the long haul. As markets fluctuate and traditional investments falter, land investments will usually increase in value over time. So, is buying land a good investment in 2023?
“Purchasing land has been a good investment in Alabama due to the overall market stability over the past several years. According to the USDA Land Values 2022 Summary, farm real estate values increased from 2021 to 2022 by 6.3%. Cropland saw an increase of 9.9% and pastureland saw an increase of 9.4%. In addition, you have the ability to farm, recreate, and improve rural property,” said Tony Hallman, Alabama AG Credit VP senior appraiser.
He said that land values appear to have remained strong in the first quarter of 2023, but that we could see potential economic impacts if interest rates continue to increase or if the recession impact increases. Having said that, in comparison to traditional investments, land is still the most reliable, especially over the long term, investment. In fact, according to the USDA long-term study, Alabama has had only two years of declining land values since 2008.
Passive Income Opportunities
Hallman explained that in addition to the property’s increase in value over time, passive annual income can be generated through cropland rental (typically $50-$75 per acre for dry cropland), pasture rental (typically $25-$40 per acre dependent on quality) and hunting rental ($6-$25 per acre dependent on location and property features).
Lee Duncan, southern regional manager of Base Camp Leasing, a premium hunting lease provider for the Midwest to the East Coast, said many landowners are not aware of the amount of passive income they can make from their property.
In fact, many landowners feel obligated to lease to friends or neighbors for a low price and have been leasing for that same low amount for years and years.
“Some landowners don’t think about leasing their land, or they’re just leasing it out to the average Joe down the street for very little money, but there are hunters out there willing to pay a good price to lease land,” Duncan said.
“One of the leases I just took over was a 100-acre track that the owner has been getting $6 an acre for. He’s now getting almost $19 an acre that’s going directly into his pocket,” Duncan said.
According to Duncan the price per acre to lease land varies per state, but in general, if the landowner works with Base Camp Leasing, they can pocket between $20 to $40 an acre per year lease.
Landowners can also earn good money through timber cuts on the property. Depending on the property and trees available, select clearcuts can be done every 15 to 25 years.
Hallman said the challenges with timberland investment is the time between cash flow opportunities.
“Pine timber is typically thinned two to three times with a final harvest over a 30- to 35-year time frame. The first stream of income typically comes around age 15. Therefore, any land improvements completed before the first 15 years are out-of-pocket improvements,” Hallman said.
In addition to monetary value, leasing your land to hunters provides additional value as well.
“When you have a group of guys scouting and hunting your property, that means there are more eyes to keep a watch out for trespassers who may be poaching, cutting timber or stealing. You have more eyes to protect that investment. In addition, some hunters will even maklucrative improvements to the property. They may put in small food plots or plant trees and they will often help maintain fences and roads. All of these things would normally cost the landowner time, effort and money,” Duncan noted..
Renowned whitetail biologist Grant Woods, Ph.D., with GrowingDeer.TV, says purchasing land not only offers an eventual financial return but you can enjoy an immediate recreational return.
“When I buy stock in Apple or Walmart, I don’t get a lot of joy out of those stocks, but my family and I can enjoy hunting, fishing, riding four wheelers and other activities on the land I purchase until I sell it,” Woods said.
Risks to Consider
There are risks when it comes to purchasing and owning land, but Woods says many of the risks can be mitigated if you do a bit of research and pay attention to the area surrounding the land you’re interested in purchasing.
“Check out the neighborhood. If you’re buying land for recreational purposes, you won’t want to buy it if someone is planning to build a big factory next door. Try to get an idea of future plans for the area. And don’t expect to get big returns if you buy land in a poor area,” Woods said.
Other risks have to do with what may happen on the land after you purchase it.
Hallman explained that the risk of owning property is typical of owning any type of real estate. Owners face potential lawsuits if an accident were to occur on their property. But the exposure potential can be mitigated by requiring renters to maintain an insurance policy to cover potential hazards.
Duncan recommended getting a vacant land policy, so if someone wanders onto your land and gets hurt, you’ll be covered.
“If you have a hunting lease, you can require those hunting your land to get liability insurance in case they get hurt on the property,” Duncan said.
The Right Piece of Land
When searching for property to purchase, Duncan said to look for something with diversity, such as water, fields, hardwoods and ample wildlife. For it to make a viable hunting lease, the property needs to span at least 40 acres. If you have a very large piece of property, you can break it up into smaller tracts that you lease out to various groups of hunters.
“Of course, marketability is affected by several factors, such as location (proximity to major cities or markets), soil quality, land class (timberland, pastureland, cropland), access (paved county road, dirt road, no legal access), properties’ location to the flood zone and low-lying areas, zoning, and topography,” Hallman said.
When it comes to purchasing land, Hallman said the loan process for ag-related land differs from residential real estate in terms of expected down payments, interest rates, etc.
“The terms offered by Alabama Ag Credit are very similar to residential real estate with the ability to loan 85% on most transactions for an extended term. Typically mortgage rates for residences are lower than long-term financing on rural property,” Hallman said.
So, when should you try to sell your property?
“The market is warm right now, and property is selling quickly. I imagine it will stay that way for a while, but you never really know how long it will take to sell a piece of land. Even if you want to sell quickly, it may be better to wait a while because land typically increases in value over the years,” Duncan said.
Hallman said there are currently several buyers that are waiting for opportunities to own land in Alabama.
“In speaking with several realtors across the state, they have lists of potential purchasers waiting for the ideal piece of property that meets their clients’ needs. Several properties are currently being contracted before they hit the open market due to the current demand for Alabama Real Estate,” he said.
“In the heights of COVID-19, the demand for rural land began to increase, due to individuals having more free time with their families. Many individuals purchased real estate for sheer recreational enjoyment and a place to make memories with their families. These investors weren’t looking for appreciation in land value, but a place of solitude to get away,” Hallman said. “However, according to the USDA Land Survey, average farm real estate has increased from $3,160 in 2020 to $3,800 in 2022 (this study covers all land classes). With this information provided, some of the individuals that purchased land in 2020 have seen an appreciation in land value 20.25%,”
As a registered forester with the State of Alabama, Hallman has always been interested in productive rural Alabama real estate and encourages others to invest in this lucrative resource.
“Over the last 24 years, I have surrounded myself with landowners from all backgrounds and have met some of the most successful individuals who just took a chance and purchased that first piece of land. I believe investing in Alabama real estate is a good way to balance a portfolio that is weighted heavily in the stock market,” Hallman said.