Last year, Wisconsin dairy producer John Shea did something he never dreamed of doing earlier in his farm career: He invested in real estate that had nothing to do with farmland.

“The farm has been good to us, but there are other things out there that might help diversify my portfolio,” says the 68-year-old Shea, who farms with his wife, two adult children and a non-family partner.

“We’re new to investing,” he adds. “We had cash sitting around not earning anything and thought we should do something with it other than leave it in a bank.”

Many farmers save working capital to purchase farmland, but farmers of a certain age may want to diversify their portfolio. Shea says he’s looking for other ways to manage capital and create future passive income.

“I’ve invested my whole life on the farm, but now I’m looking for something off-farm, and I don’t feel comfortable with stocks,” he explains. “I wanted to invest in something that feels real — like
real estate.”

 Shea works with Mike Downey, co-owner of Iowa-based Next Gen Ag Advocates, which focuses on transition planning and unique matching and mentoring for non-family successors.

Downey and his wife also founded Farm Raised Capital, a group that identifies alternative assets and underperforming properties, such as apartment complexes, and helps farmer-investors and ag professionals become limited partners in the actual real estate. The properties generate steady monthly income and pay cash distributions to investors.

Related:Why farms with no transition plan often fail

“In transition planning, there are two areas being underserved for farmers: succession planning and supplemental off-farm income,” says Downey, who writes the More Than Dirt blog at FarmFutures.com. “In general, a lot of farmers aren’t really diversified. That’s why we started Farm Raised Capital, to help solve those issues.”

2 advantages

It turns out investing in off-farm real estate has some advantages. For young farmers, trying to put together a stake to buy farmland is tough, but syndicated real estate offers a way to capture higher returns more quickly than farmland, if you don’t mind a certain level of risk.

“Farmland appreciates historically over time at 4%,” Downey says. “If we can get a doubling of investment value over five to 10 years, that’s like a 15% to 20% return and increases your stake to use for farmland.”

One disadvantage to farmland is it’s not depreciable, which is not the case with commercial real estate. “In my own discovery process, I realized, commercial properties offer strong tax benefits. You can use paper losses to offset passive income once you have retired, for example.”

This kind of investment might be a partial solution for farmers looking to transition out of the business but feel trapped by the deferred tax treadmill. Alternative investments offer a way to get off that treadmill and more quickly transition the farm to the next generation. 

“When you have deductions your whole farm career and lose those deductions, some farmers end up with an income tax problem more than an estate tax problem,” Downey notes.

How it works

A tax professional or engineer does a cost segregation study. For farmland, that activity puts a value on fences, tile, buildings and even fertility — all items you can depreciate but are a small fraction of the overall value of the land.

With commercial real estate, the story is flipped. A cost segregation study for an apartment complex, for example, puts a value on pools, parking structures, appliances and the buildings themselves. A large majority of that can be depreciated upfront and not over several years.

Downey leverages relationships with real estate syndicators, who do the critical analysis on a potential investment property — another advantage for passive investors. These properties could be anywhere in the country. The syndicators look at various factors for you to consider before investing, including:

“We look at their due diligence and stress-test their underwriting, so that you don’t have to go find an apartment building somewhere that you manage yourself,” Downey says. “A lot of people in the ag community don’t have the time or interest to do that.”

A syndicator organizes a group of people who pool funds together. Investment minimums can be as low as $25,000 or as high as $500,000. As an investor, you become a limited partner in the overall property. Your stake may represent 1% or 2% of overall ownership.

There are downsides to this investment approach. First, your money is tied up for a predetermined period of time. Second, there is risk and no guarantee of the expected payoffs. Generally speaking, real estate is a reliable and predictable investment avenue over time.

Apartment hunting

Say you invest $100,000 into an apartment complex. Right off the bat, that offers a tax benefit of $50,000 to $70,000 in the form of a Schedule K-1 paper loss.

Each project has different profit goals. One apartment complex may offer cash flow from day one. Another may need a five-year plan to renovate the property, increase rents and provide a bigger payout
at the end from a sale.

And other properties may focus on tax write-offs. For example, an oil and gas property is unique in the IRS code. Instead of 50% to 70% in write-offs, you might get 80% to 90% in write-offs, and it can be used to offset not only other passive income but also active income.

These attributes are factors to assess before investing. Alternative investments may or may not fit your financial goals. In any case, farmer-investors like John Shea won’t have to spend much time babysitting his alternative investments.

In fact, once you’ve invested, you don’t need to spend any time at all on them.

“Historically, sources of supplemental income come from other enterprises related to the farm — selling seed, livestock, or a part time job — and all those things require time,” Downey concludes. “This is one investment that is truly passive — that doesn’t take away from your farm and family time.”

Learn more about navigating multi-generation operations at the Farm Futures Business Summit in Coralville, IA, Jan. 9-11, 2024.