Why Land Holds Value in Times of Market Disruption

by Jason Burbage

IIt’s no secret that investors here in the U.S. and around the world are very nervous and uncertain about where to put their money amid the current COVID-19 crisis. The volatility of the markets — from equities to bonds to commodities — over the past few weeks tells a very grim story about investors’ portfolios.

The Dow Jones Industrial Average, for example, shed about 40% of its value from the beginning of the year before beginning a halting ascent.

Entire industries such as travel and restaurants have ground to a halt. As could be expected, the ripple effects are severe and will be felt throughout the entire economy.

So for investors searching for peace of mind, where should they put their money?

The Promise of Land

Diversification should always be the priority of every investor, especially during uncertain times. Diversifying one’s portfolio is more urgent than ever lest one avoid sliding into a financial abyss. One investment class that often flies under the radar but offers strong long-term growth and stability, even in times of uncertainty, is land.

Whether it’s for farm, ranch, plantation, timber, recreation, or commercial development, land is one of the oldest and most reliable investment classes in existence. But when people typically think of real estate investments, they associate them with rental properties, commercial properties, and foreclosures. They seem less likely to think of raw land as an investment and end up missing out on many significant benefits.

Some will say that land is a boring investment. It is true that land

investors often are in for less of an adrenaline rush than people who bet the farm (no pun intended) on the latest tech stock or on a precious metal that because of its industrial use or speculative potential has suddenly become all the rage. The thing is, the tranquility of mind offered by land for these reasons is exactly what land investors love most about their strategy.

Low Correlation to Other Investment Classes

Land is a safe bet because its returns have little correlation to stocks, bonds, precious metals, or commodities. For example, during the financial meltdown of 2008, land value didn’t fall in a single quarter.

Land is a Limited Resource

Land is a limited resource that is relatively inexpensive to own and requires little maintenance. A growing population is encroaching on land acreage and the result is that it consistently outperforms other asset classes over time. Money can be printed through seemingly unlimited “quantitative easing” but the amount of available land can never be expanded. Land holds its value because of the simple law of supply and demand.

Still not convinced? Let’s pull in some data on institutional timberland investments from the National Council of Real Estate Investment Fiduciaries: • 1997 timberland values averaged $1,001 per acre, with one-year total returns of 14.2%. About 7.1% from this return came from appreciation and 7.1% from income. • 2007 timberland values averaged $1,500 per acre, with one-year total returns of 11.5%. About »

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3.8% from this return came from appreciation and 7.7% from the income. • 2017 timberland values average $1,823 per acre, with one-year returns of 3.3%. About 0.7% from appreciation and 2.6% from income.

Calculating the return on any asset class is a matter of simple math and the math for timberland, as for other land investments, continues to look solid.

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Limited Competition

There is little competition in the land market because most real estate investors are focused on other types of investments such as rental and commercial properties. Little competition means that there is less risk of the type of speculative bubbles that you will see arise during times of strong economic growth in the office space market for example.

Land is a Long-Term Play

There is a large profit to be made in land ownership, but it is not a get-rich-quick proposition. As a longterm, tangible asset, raw land doesn’t wear out or depreciate. It produces enormous wealth over generations, both through appreciation and rents. This outpaces stocks, gold, and many other assets.

Here are a few examples ways to make a profit through land ownership:

• Buy and Hold – Purchase land at a good price, hold and sell after appreciation. • Establish a Farming Lease – Farmland has historically produced larger returns than stocks, bonds, and mutual funds over the long

run. A landowner can normally earn enough from agricultural leases to cover the taxes and insurance, and still make a small profit. However, keep in mind that farmland is normally more expensive and will require more capital to get started. • Establish a Hunting Lease –

Hunting lessees normally take excellent care of the property they are leasing. They also do a great job of patrolling the property and keeping away poachers.

As in a farm lease, landowners normally earn enough from a hunting lease to pay the taxes and insurance. • Offer Owner Financing – Land loans can be difficult to secure from traditional banks at times.

Offering a buyer owner-financing is a way to sell the land and earn interest. Most owner financing deals offer higher interest rates than traditional banks.

Raw land is an a-cyclical asset class that keeps its value because there is only that much land to be bought. Limited competition makes bubbles less likely to occur than in other asset classes and there are plenty of ways to make sustainable profits with land ownership. For all these reasons, land has always been and should always be part of the diversified portfolio of every prudent investor. MHV

Jason Burbage is an experienced leader with a demonstrated skills in management, real estate sales, large acreage, rural property, farms, estates, and public speaking. Living his entire life in the Carolinas, Burbage grew up in rural Sheldon, S.C. on his family’s farm.