Can farm lands give you good returns?

“I dream of becoming a farmer” has been trending among urbanites over the last few years. Now, the Covid-19 crisis, especially in the cities, growing awareness on the need for healthy food and lifestyle as well as the new options to work away from office have further increased the attractions of farm life. While the non-financial benefits of the concept are good, you must still analyse it from an investment lens, before ploughing deeper.

Why buy

There are at least five main attractions to farm land investment. One, if you are keen to invest in real estate, traditional choices — commercial assets such as malls, offices and retail spaces, residential properties or land — have less potential and higher risk, currently. With rural development and agricultural growth emerging as new themes, asset purchase with this focus can turn out be a good bet on Bharat.

Two, farmland investments can be attempted with a much smaller capital. For example, flats may require investments of over ₹20 lakh, at the very least; agri land may be available for as low as ₹2 lakh per acre. Three, unlike plots of land — which can also be bought with a small sum — farm land can potentially provide you income. For instance, depending on circumstances, an acre of land can give an income of ₹30,000 per year and a return of 3-5 per cent potentially, after expenses. Your profit can be higher for larger land or based on operational decisions such as what to grow and how to sell.

Four, you can boost the capital appreciation potential by improving the land. One method is to convert the land to be organic over a few years, making it more attractive for buyers. Other choices include adding irrigation and other resources to enhance output.

Five, some low-yielding agri lands may give good capital returns if they are converted to industrial or other purposes. One example is new infrastructure development such as roads, or economic zones such as industrial parks, for which the government may buy the land. The price paid for land acquisition can be attractive — the Land Acquisition Act requires paying two times the prevailing rate, plus compensation for other losses, in case of taking over rural land.

Risk factors

However, there are at least five uncertainties that you must manage with the investment. One, the purchase may have a high risk of legal tangles, due to lack of land records, undocumented legal heirs and local issues such as shared access. Two, you must budget for ongoing expenses to manage land and not think of it as a residential plot. For example, local norms may require that the land must be cultivated and you will need to manage this, remotely.

Three, if you are counting on the income, be prepared for wildly varying cash flow, due to the vagaries of weather and other factors. If you are new to this, managing labour, investments in equipment, may lead to loss in the first few years, until you find the right fit.

Four, if the purchase was on the hope that the land may be acquired for a project, be sure to plan for a long wait to get a pay-off. For example, a demand raised in September 2015 was paid after three years, in August 2018, based on a case filed in the Patna High Court.

Five, while real estate investments are generally illiquid, farm land may be more so. It could take a long while to find a buyer and complete the transaction, as agriculture land is not an asset that is meant to be traded. There are also potentially high transaction costs due to legal fees and multiple visits that may be needed to close the deal — buying and selling.

Weighing in

Farm land can add diversification along with return potential to your portfolio. This is especially true if you have a horizon of ten years or more. And for those who have a penchant for farming, it may help to quantify the non-financial benefits also in money terms. For example, you may find that rural setting a stress reliever when used as a weekend getaway; you can attach health-benefit savings to this. For others, it can become a new career and some costs may be thought of as educational fees to pick up new skills. That said, these benefits must be weighed against the operational hassles.

One more aspect to check on is whether you are eligible to buy agri land. This is a State subject and many States have restrictions on who is allowed to buy and how much.

Golden harvest

You can get paid two times the prevailing rate, plus other compensation when rural land is acquired

Don’t land in trouble

Legal issues

Illiquid investment

Ongoing expenses

The author is an independent financial consultant

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