Landowners’ Cash Opportunity
We all know that land can appreciate in value over time, but what many people don’t realize is that their land can also produce income. This passive income can be derived from a variety of ways, depending on the type of property and its specific features. Some examples include hunting leases, mineral rights, renewable energy development for wind turbines or solar panels, and various other agricultural related arrangements. These opportunities may require a greater amount of activity from the landowner, but they can still provide a substantial source of revenue.
In fact, the ultra-wealthy are now acquiring farmland for this very reason. They see this as an opportunity to generate significant cash flow while also gaining exposure to the ever-expanding world of food production. While this isn’t a strategy for everyone, it’s one that many people should consider as they evaluate their own investment goals and objectives.
One way to earn passive income from your land is through a traditional cash rent agreement. In this arrangement, the landowner contracts with a tenant farmer to grow an annual crop on the property. The contract typically provides for a fixed dollar per acre-per-year in return for the right to use the land during the contract year.
This arrangement is ideal for those who do not have the experience, capital, or ability to actively work their land. In addition, it can be a tax efficient strategy since the resulting profit is often deferred until the sale of the property (assuming the contract does not terminate earlier than the death of the landowner).
Another option for earning passive income from your Landowners’ cash opportunity is through a crop share arrangement. This type of contract pays the landowner a percentage of the total crop revenue each year, with the percentage varying based on market conditions, commodity prices, and yields. This is often a good alternative to the cash rent model, since it can offer a higher payout in years with high commodity prices and/or yields.
A third option is to sell the land and then engage in a 1031 like-kind exchange, where the proceeds from the sale are re-invested into another piece of real estate that produces income. This can be a great way to avoid paying taxes on the capital gains from the sale of your land, especially if it’s being reinvested into a qualified zone.