The AcreTrader Relative Risk Score (ARRS) is a score we designed internally to judge the relative (not absolute!) risk of various offerings reviewed for listing on our site. While we share this score with our users regarding specific offerings, please note the ARRS is not to be relied upon as a single determinant of risk.
Additionally, note the information below is not intended as investment advice. Please see our disclosure of additional risk factors here.
What is Relative Risk?
Put simply, standard investment risk and return usually share a somewhat inverse correlation; the lower the risk of a given investment, the lower the expected return, and vice versa.
Government bonds for example, are often seen as low risk, but they offer low returns. Inversely, speculating on currencies in developing countries or typical equity crowdfunding may offer high potential returns, but often come alongside high risks.
Agricultural farmland has historically shown what we view as impressive returns alongside relatively low risk (check out our white paper for more info). However, not all farm investing or general crowdfunding opportunities are created equal.
Thus, we created 3 basic questions to help us determine our AcreTrader Relative Risk Score (ARRS):
- Is there existing or planned debt on the subject investment property?
- Are there necessary or planned improvements for the property?
- Are there additional business risks (non-core to farming)?
Examples of the AcreTrader Relative Risk Score
Based on the simple yes or no answer to the above questions, we then describe the project's relative risk as one of four categories:
A low ARRS means a "no" answer to all of the above questions. While these properties will typically have a lower IRR, this comes with a low risk relative to other properties we have reviewed.
An example might be an existing corn farm with no debt, no external businesses, and no planned improvements.
A moderate ARRS means a "yes" answer to one of the above questions. This type of farm may offer a slightly higher IRR.
An example of a moderate relative risk farm would be the existing corn farm above, but with a planned investment to improve the grade of the land, and the project is funded with cash raised up front.
A high ARRS means a "yes" answer to two of the three questions.
An example might be the same farm above with planned investments, but the project is funded with debt in order to increase returns. While the IRR may be increased via debt (as opposed to using up-front cash from investors), the risk profile is potentially higher as well.
A speculative ARRS means a "yes" answer to all three of the questions. These properties will typically offer the highest IRR but come with the highest risk relative to other properties.
An example might be a corn farm that also has an attached dairy operation, where debt is issued to improve the property and the dairy business output.
Most of the real estate crowdfunding deals we see on the major crowdfunding sites would fall into this "Speculative" category given often high levels of leverage, complex organization, "value-add" necessity, and/or other potential business risks.
To summarize, there is no "one-size-fits-all" when it comes to investing, and this holds true with farmland as well. While many farms are lower relative risk, this comes with a lower potential IRR. We don't view agriculture and farmland as a get-rich-quick scheme, but rather as a conservative way to earn attractive, risk-adjusted returns over many years.
Note: The information above is not intended as investment advice. 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 and conditions.