Farmland has attracted investors looking to create a long term investment in a physical asset, diversify their portfolio property types, and look to other opportunities aside from standard residential and commercial. In contrast with purely financial investments, agricultural land is physically used to support farming, food production and rural livelihoods.

However, farmland is not a guaranteed safe investment: farmland prices are influenced by a variety of factors, such as its location, soil quality, water access, legal ownership, access and infrastructure, as well as the length of time the investor holds the land. One has to determine the land’s appreciation and potential, as well as legal and practical risks prior to making the investment.

What makes farmland a potentially strong long term investment?

Farmland is a real asset: although the supply of land in a given area is limited, its value is not inexorably linked to its location. The local economy, agricultural potential, water access and development restrictions can impact the investment potential of farmland in that location.

Land is typically considered a long term investment for four main reasons.

A physical asset with potential: land can be physically viewed and inspected, surveyed for its qualities, documented and transferred as per the appropriate laws.

Appreciation potential: farmland near developing towns, existing agricultural markets and improved infrastructure can potentially appreciate over time, but it must be verified for each individual parcel.

Agricultural potential: suitable land can be used to grow crops, horticulture and other legally permitted agricultural activities, but it needs to have the appropriate conditions to do so.

Portfolio diversification: for many investors, agricultural land represents a category of physical real estate investment distinct from listed securities and other residential or commercial property investments, but it typically involves its own set of risks. These are some of the reasons why farmland is a long term investment option for many.

Benefits of Investing in Farmland

Here are the benefits of investing in farmland to look out for before investing: 

1. A physical asset with potential

One of the main benefits of investing in land is that it typically possesses an element of physical utility. Agricultural land can be used for food production, orchards, horticulture and other allowed activities, depending on its characteristics and local conditions.

The tangible value of agricultural land is separate from assets backed primarily on financial speculation. However, the ability to generate income from farmland is not guaranteed: farmland needs to have suitable soil, water access, operating conditions and other factors to generate returns. One has to determine if a parcel’s utility outweighs its risks.

2. Potential for appreciation

Land prices can rise when demand rises, roads and other developments are made, and/or the local economy grows. However, not all these factors are universal: one has to evaluate the parcel in the context of the local conditions.

A prospective buyer of farmland needs to assess recent comparable transactions, road access, job access, water access, and general development plans for the area. Do not rely entirely on a seller’s projected appreciation for the parcel: make sure that a conservative evaluation would still be profitable, and that it would not take an unreasonably long time to resell the parcel.

3. Possible agricultural income

Depending on a parcel’s characteristics, the local laws and the chosen investment structure, a farmland parcel can potentially yield agricultural income through cultivation, horticulture, or in some cases a farm management agreement with an agriculture company.

It is important to remember that aside from the initial purchase price, there are costs associated with agricultural production, including labor, seeds, irrigation, maintenance, harvesting, taxation and management. Agricultural income can be a lucrative source of income, but it is not a guarantee and should be evaluated for its risks and costs.

4. Portfolio diversification

Investors with existing residential property investments or those looking to diversify their portfolio can consider agricultural land as an alternative type of property investment.

However, a farmland investment typically comes with its own set of risks and lower liquidity than publicly traded investments. In addition, it typically requires domain-specific expertise and due diligence to make a purchase, and one should not invest an excessively large sum in a single parcel. These are some of the deliberations in making an investment in farmland.

How to Understand Long-Term Investment Potential of Farmland?

The long term investment potential of farmland goes beyond the parcel’s size or initial price. The following factors are worth considering when evaluating farmland as a long term investment.

1. Connectivity & Access

Reliable road access is essential to any long term development plans. Assess the parcel’s proximity to existing and planned roads, as well as job access and local infrastructure.

2. Soil & Water

Good soil, natural drainage, irrigation access and reliable well or surface water are essential for the use of the parcel. Consider having soil tests done and physical inspection of the parcel.

3. Infrastructure Development

New infrastructure such as roads can improve land values, but these can be years or even decades away. Double-check that announced infrastructure development will actually take place, and look at the government announcements rather than what the seller says. In addition, keep in mind that new road construction can sometimes be canceled.

4. Local Demand

Look into the local property market to assess the investment’s potential. Review local land sales to compare to the subject parcel. Bear in mind that a high asking price does not necessarily determine the property’s value.

5. Legal Status

The land’s ownership history, category, and access can affect its value and potential. Some parcels come with additional restrictions or guidelines. Review legal documents with a experienced property lawyer.

A longer time frame for holding onto the land allows the owner to benefit more from any price appreciation, but it also has transaction costs and the opportunity costs of tying up one’s money for an extended period of time. There are no guaranteed rates of appreciation or minimum time frames in farmland investment.

Legal Checks Before Buying Agricultural Land in India

Legal checks should be one of the key components of any farmland purchase, as a visually appealing parcel might have hidden restrictions or limitations that would make it a poor investment. 

India does not have one standard set of criteria about agricultural land purchases: eligibility criteria, landholding limits, and rules about land sales can vary by state and parcel.

Before making a purchase, the following checks should be performed.

Verify Ownership and Title

The buyer should consult an independent property lawyer to review the registered sale deed, previous title records and other ownership documentation. The property title should be verified to ensure that there are no inconsistencies in the title, disputes, inheritability issues or other concerns.

Revenue records can be a major component in the verification process, but a revenue record entry on its own should not be considered a valid guarantee of clean title.

Check Encumbrances and Disputes

Verify that there are no mortgages, registered charges, easements, disputes, acquisition notices or other encumbrances against the property. If available, obtain dispute resolution records and relevant local certificates. The buyer should also verify that the seller is actually entitled to sell the property.

Confirm Eligibility

Agricultural land purchases can have specific restrictions, such as eligibility to buy in a particular state or purchase limits, depending on the buyer’s category. Confirm the local regulations for the specific parcel and buyer beforehand, before paying a significant deposit. Non-Resident Indians and Overseas Citizens of India are subject to additional rules about agricultural land, farmhouses and plantation purchases under foreign exchange regulations.

Verify Land Classification and Use

Review the land records and survey maps to confirm the land category, and any applicable restrictions. Agricultural land cannot be used for building a farmhouse, resort or other structures without appropriate approvals. Any changes in land use must follow the requirements in the relevant laws and should not be assumed to be permitted by a verbal confirmation or projected future value by a seller or agent.

Confirm Boundaries and Access

Verify the survey number, area and boundaries mentioned in the documents against the actual survey and site visit. In addition, determine that the parcel has reasonable access to public roads, private access easements and other access infrastructure, if any. Examine water rights, drainage and shared access, as needed. Additionally, the Department of Land Resources provides information on land-record modernisation and digitised records:https://dolr.gov.in/.

How to Evaluate Farmland Projects Before Investing?

Not all of the farmland projects offer the same level of ownership rights, existing infrastructure or potential possibilities. The buyers should be especially careful regarding the difference between purchasing an independently defined agricultural parcel and investing in a development project.

Firstly, it is essential to clarify who owns the property and whether the seller is the initial owner. The buyer should request the specific identification of the parcel, survey, and title documents, the required approvals, and a detailed description of the provided benefits.

Secondly, the offered price should be compared to the prices of similar recent transactions. The significant differences in the infrastructure, road access, irrigation, and rights to usage might impact the value.

Thirdly, the buyer should analyze the developer’s promised improvements independently. If the company promises to construct roads, install utilities, and erect fences, it should verify which of these were approved, built, and completed.

Lastly, the most critical aspect will be the exit option. The buyer should request who is going to purchase this land to resell it, how long it will take, and if any costs are associated with this procedure.

A properly marketed project does not guarantee investment safety; thus, the independent verification of all information and legal documents prior to making any down payments is mandatory.

Farmland vs Farm Plots: What Is the Difference?

The terms farmland and farm plots are sometimes used interchangeably, but this may indicate the absence of one of the critical aspects of a real estate deal. In contrast to farmland, a plot is a separate parcel that might be a part of a farm development scheme. The term “farmland” refers to land appropriate for agricultural production, while “farm plots” indicate lands subdivided within larger agricultural lands.

Neither category is automatically safer. Before buying farm plots, verify that the subdivision and transfer are legally valid and that the promised use is permitted.

Do not assume that a plotted layout or farmhouse marketing campaign grants permission to construct a residential building.

Common Risks of Long-Term Farmland Investment

1. A sound investment decision considers the potential downside, besides opportunities to increase the value of a property.

2. Low liquidity in the agricultural land market may take a longer time, particularly in certain locations.

3. Agricultural land prices may not appreciate significantly over time development expectations may not coincide with actual demand.

4. Legal complications like unregistered titles, disputes over boundaries, and limited transferability and unauthorized land-use changes impede a sale.

5. Operating costs like fencing, upkeep, and security and irrigation and land management may lower one’s returns on the property

6. Environmental risks like water scarcity or flooding or bad weather or degradation can diminish the value and desirability of the land.

7. A concentration risk emerges if one were to put a major fraction of one’s available capital into a single plot.

8. A practical approach is to factor in the costs of acquisition and holding on to the land, allowing for a longer exit period and avoiding loans on the belief that the value of the land is guaranteed to appreciate.

Is Farmland a Good Investment for You?

Farmland can be appealing to a buyer who is well-versed in the legal status of the land, who is willing to accept illiquidity and has a defined horizon for the investment and is looking to diversify or have an alternative to a traditional property holding. It may be a poor fit for an individual who cannot access their investment immediately or anticipate stable short-term returns or intend to construct on the parcel without first verifying permissions.

Before making a commitment, one must compare farmland to residential plots and rentals, among others, in terms of budget, risk profile, intended holding period and exit.

At The Whitelisted Estates, a structured property evaluation begins with understanding the buyer’s objectives and then moves on to identifying suitable locations and legal due diligence and a realistic evaluation of alternatives. Independent professional advice is essential when the ownership or use of land is not entirely clear-cut

Conclusion

The investment in farmland can be a rewarding one, provided that the land is legitimate, appropriately valued, right for its intended purpose and has credible demand. Although farmland’s physicality and agricultural utility are definite advantages, its ownership and lengthy holding are not guaranteed to generate profits.

The most rewarding approach to investing in farmland is balancing the expectations of financial gains with the analysis of the location, title, land use, and the possibility of an exit. It is essential to compare farmland’s characteristics with the characteristics of other investments and consult independent professionals when necessary.

Thus, the The Whitelisted Estates can assist in evaluating farmland for purchase with respect to its location, documentation, intended use and risks by helping the buyer address the complexities of the transaction and focus on its specifics. Considering the investment’s potential importance, it is critical to pursue the informed decision-making rather than the mindless speculation

Frequently Asked Questions