How to Invest in Agricultural Real Estate in Illinois
If you want to invest in farmland you must remember that you ultimately will be in charge of managing a farm and marketing your crops to buyers. In that respect, investing in agricultural real estate is much like investing in any other small business, and if you don't have an agricultural background you may be at a disadvantage. However, many investors have recognized that agricultural real estate is a solid alternative to traditional stock market investment. One of the main crops in Illinois is corn, and given the increasing demand for that crop, agricultural real estate in Illinois can be a profitable investment.
Hiring a Broker
Search for potential brokers.If you want to invest in agricultural real estate in Illinois, you need to look for brokers who are located within the state of Illinois and have familiarity with the agricultural land available there.
- While it may be fairly easy to find a number of brokerage firms, keep in mind that agricultural real estate brokers have specialties just as residential or commercial real estate agents do.
- You want to find a broker who primarily represents buyers, not sellers.
- Also look for a broker who is based in Illinois, rather than someone who is based in another state but handles transactions in Illinois.
- Brokers based in Illinois will have a better understanding and familiarity with the farmland available in the state.
Identify your interests.The types of land you are interested in will depend to a large extent on the types of crops you want to grow. The ideal property size in which you want to invest also may determine the parts of the state on which you need to focus.
- Your interests also may affect the broker you choose, since different brokers may specialize in different crops or different types of land.
- For example, if you want to invest in farmland where corn is grown, you shouldn't be hiring a broker whose past transactions have been primarily soy farms.
- A broker who specializes in the type of farm in which you're interested will understand better how to evaluate the quality of the farmland, including soil composition and irrigation.
Interview several brokers.Ideally, you should interview several brokers so you can compare and contrast their background and experience and choose the individual broker or brokerage firm that is best situated to meet your needs.
- Be up front with the broker about the reasons you want to invest in agricultural real estate and the type of farmland you're looking for.
- Ideally, you want to find a broker who has had several clients with interests similar to yours, and has a successful track record of locating property for those clients.
- You need to not only look at the purchase deals the broker has made, but the success of those investments and the production of those farms after the fact.
Make your final choice.After you've talked to several brokers, you're ready to make a decision on who will best meet your needs and help you find the type of property you want at a price that will fit within your budget.
- While the broker's fees should factor into your decision to some extent, don't make it the sole or even primary factor.
- Keep in mind that ideally, you actually will save money, even after the broker's fees, because the broker should be able to get you a better price on the real estate than you would have been able to negotiate on your own.
- Once you've decided which broker you want to hire, make sure you get the details of your relationship in writing.
- Request a written agreement from your broker and read it carefully. Don't be afraid to ask if you have any questions, such as if there's a term you don't understand or with which you don't agree.
- If you have serious doubts about a broker agreement, take the time to have an attorney read it before you sign.
Buying Your Land
Calculate your budget.Before you start looking at properties, determine how much money you want to invest and whether you'll need to explore loans or other financing options to purchase your agricultural investment property.
- The money you make – your return on investment – depends on how much money you put into the property. Estimate your budget carefully, then stick to it.
- If you're unsure exactly how to estimate operating costs or other expenses, speak with your broker and other agricultural business experts so you have a realistic picture of the money you'll need to spend.
- Once you have a solid idea of the amount of money you're willing to spend on agricultural real estate, don't even look at properties outside your budget.
- Keep in mind that it can be all too easy to fall in love with a property just over your budget, decide to take the risk, and end up losing money.
Evaluate properties listed for sale.You typically can find agricultural property listed for sale online. Your broker also may know of properties for sale, including properties that are being listed at auctions.
- Location is an important factor in evaluating property. If you're interested in a particular property, take a trip out to look at it in person. In addition to the land itself, pay attention to the neighboring properties and the areas surrounding the parcel.
- If you've identified particular parts of the state that you prefer, get in contact with area realtors and find out what properties are available or potentially soon to come on the market.
- You also can find properties for sale on the internet or even in the local newspaper.
- When evaluating available properties, keep your budget in mind and have patience. If something that meets your needs and is within your budget isn't immediately available, you should be willing to wait for something that will work for you to come on the market.
Identify promising properties.From your searches, you can zero in on properties that seem best suited to meet your needs, including the level of development of the property and the type of crops cultivated there.
- After you've identified properties in which you're interested, you'll want to put additional work into researching the property thoroughly before you make an offer.
- Typically the realtor will have a lot of information to provide you about the property. However, keep in mind that they are working for the seller and their job is to sell the property.
- Any information you get from the realtor usually should be independently verified, unless they've given you a report from a credentialed and independent third party.
- You also want to make sure you go out and look at the property yourself at least once before you make an offer.
Understand what is included in the price.For each property in which you're interested, you should receive a written list of what exactly is included, including equipment, structures, and any existing leases.
- Knowing what's included in the purchase price can help you determine what additional investment you'll need to make after you've purchased the property.
- Ideally, you can find farmland within your budget that includes all the equipment, fencing, and structures you'll need to start (or continue) growing crops as soon as you close on the property.
- In some cases, however, the current owner may be planning to remove necessary equipment to use elsewhere, which means you'll have additional expenses that must be added to the purchase price when considering whether the particular parcel fits in your budget.
Negotiate with the seller.Once you've chosen a property in which you want to invest, you and your broker will make an offer. The seller may make a counter-offer, at which point you will begin negotiations until you reach a final purchase price.
- Be up front with your broker about what you want and where you'd ideally like to end up. If there are any items not included in the purchase price that you'd like to be added, you can discuss this with your broker as well.
- Generally, you'll work with your broker to set a maximum you're willing to pay for the property. Your first offer, however, typically will be much lower than this amount.
- Your broker will handle much of the real work of negotiating the sale, although you should expect to be consulted regularly during the process.
- Once you and the seller have agreed upon a price, a sales contract will be drawn up. Typically you'll sign this contract and provide a sum of earnest money to guarantee the sale until closing.
Close on your property.Expect to close on the property within 30 days of the date you and the seller sign the contract for the sale of the property. If you need to secure a loan or other financing, it must be done during this time.
- If you're seeking financing, your lender will take care of the necessary title searches and appraisals before closing.
- Once all this is completed, you'll meet at the courthouse or county recorder's office to take care of transferring the deed.
- After the transfer is complete, make sure you receive copies of the deed, as you'll need it to have any government programs or subsidies transferred to your name.
Managing Your Investment
Consider hiring a farm manager.If you have little experience managing an agricultural business, a farm manager can help you handle the business aspects of your investment as well as the farm's day-to-day operations.
- Farm managers can handle nearly everything connected with the farm, or be in charge of specific tasks or areas of operation.
- If you decide you want to hire a farm manager, invite several managers to bid. You can evaluate those bids and choose the manger who best suits your needs.
- Farm managers typically charge a percentage of your annual gross rent revenue, or your revenue from crop sales. Which revenue stream, and the percentage, will depend on competition in your area as well as the relative experience of the manager you hire.
Negotiate crop leases.Your property may have come with existing crop leases. If not, you'll need to develop new crop leases by marketing your farm to potential buyers and negotiating the terms of the lease agreement.
- You'll need to gather information and complete projections and reports for your farmland so you can develop a marketing plan for your farm.
- Various factors will impact the price of your crop leases, including the crop history and production levels of the property as well as the soil quality, drainage, and irrigation.
- Many of these reports may have been completed when you were evaluating the property prior to purchase, but others you'll have to complete after the fact.
- Being transparent about the condition of your property and providing reliable, independent assessments of the farm's potential can enhance tenant confidence and increase your lease's price point.
Supervise operations.As the landlord of the agricultural real estate in which you've invested, you are responsible for overseeing the farm's operations and ensuring that crops are being harvested according to the terms of your crop leases.
- As the landlord of your agricultural real estate, you are responsible for ensuring that the crops grown on your farmland are cared for and harvested according to the terms of the crop lease.
- If you don't live close to the farmland or find it inconvenient for other reasons to check in on your farmland on a regular basis, this is a task for which hiring a farm manager can prove beneficial.
Pay operating expenses.There can be significant costs involved in an investment in agricultural real estate, including day-to-day expenses similar to operating any small business. You also will be responsible for buying and maintaining insurance on your property.
- These expenses should have been factored into your budget. However, you'll want to review your budget on a regular basis and adjust it as necessary to reflect your actual costs in operating your farm.
- You'll need to keep tabs on your farm's infrastructure, so you know when important structures or equipment need to be replaced and can do this proactively rather than waiting until something breaks down and suffering down time and loss of production while it is replaced.
- Keep detailed records of regular operating expenses as well as one-time and incidental costs you incur.
Prepare annual budgets and business reports.As with any small business, annual reports and profit projections are crucial to business management and understanding your return on investment. The production of specific reports may depend on how you've financed your property purchase.
- Some lenders may require annual business reports, including budgets and profit-loss reports.
- You also will need these figures to calculate your taxes and file your tax returns.
- It may be to your benefit to hire an accountant who has experience working with agricultural businesses.
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