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Q: Please discuss the expected annual depreciation, cash flow, and appreciation. So how do we model returns?
A: There's an article on our site, “The Internal Rate of Return for Farmland,” that details this in specific. And each farm will have its own financial model or financial expectations. For the depreciation, land itself, you know, a core thesis here is that the land will continue to appreciate, and also the tax code specifically says it's not something you can differentiate. So that is a material part of the investment, but any improvements like drainage tile, even fence rows, irrigation equipment, and trees for orchards, you can depreciate, and so our CPA would handle that, but that could be passed through on the K-1 as some sort of shield on some of the income.
On the cash flow, as I mentioned, each farm will have its own projection for that. The orchards are typically a little bit more variable just because the trees have a production schedule throughout their life. For row crop firms, we’ll just take the current rent contract. If it's rented out today at $300 per acre, even if we think that will get up to $350 per acre over the next few years, we’ll just use the current rent to rent contract in order to be conservative and and use that for projecting the anticipated distribution for the yield each year.
The appreciation: We use the 50-year average for farmland values appreciating in order to project that as well. So we don't have a mark to market speculation. It's just meant to, to model that farmland has continued to be a very consistent appreciating asset class. And so we do that, and we hope that we can outperform that in many cases, as well.
This video is the final segment of a longer introductory webinar covering farmland as an investment, how AcreTrader works, and common questions asked by new investors. You can view the webinar in its entirety here.
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.