The farm crisis of 1985-1987 was amplified by large amounts of debt in the system, as farm price appreciation of the early 1980s drove heavy amounts of investment from speculating farmers that placed large amounts of leverage on their farms. When prices began to go down, this set into motion a spiral of defaults, forced resales, and lower prices. Debt-to-equity leverage ratios peaked in 1985 at nearly 29%. Compare that with today, where the USDA estimates leverage at a near-record low of 14%.
This small amount of leverage, or total debt, involved in farmland makes the return profile even more impressive when compared to other assets like commercial real estate. While debt can often help amplify returns for real estate investors, it also greatly increases the risk. For example, if you buy a retail center with a 20% down payment, the other 80% is covered by debt from the bank. If the value of the property goes down by 20%, the value of your investment becomes zero. Not only that, but don’t forget you still owe the bank the other 80%.
Unlike most real estate investments, typical plots of U.S. farmland have little or no debt on them. Typical properties on AcreTrader have no debt on them either, meaning investors own 100% of the subject property without the involvement of banks or significant debt.
Note: The information above is not intended as investment advice. Data in the charts above is through year end 2017 and is sourced from Bloomberg and NCREIF, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our Terms & Disclosures here.