One category of real estate investment is agriculture investments. Agriculture real estate is similar to commercial and residential real estate in that you can achieve an annual income from it unlike raw land banking. Agriculture investments like raw land banking allow you to own a lot of land. At this moment in history, agriculture investments are probably one of the best performing sectors with high future growth potential, low risk, and relatively high annual cash returns.

Agriculture real estate is one of the least talked about, and often the smallest part of many people's real estate portfolio. Understanding it is the key to getting more involved in agriculture real estate. Below, we will go into much greater detail on how and why you should be adding agriculture real estate to your portfolio, particularly at this time in history.

Fully understanding the concepts of real estate can feel complex but once broken down becomes simple, once you learn the 6 basics points governing success in real estate investing. The simplicity is based on knowing these 6 simple concepts that you should always follow when investing in any sector of real estate.

1. Understand cash flow measures and potential value growth: Real estate investing has a significant potential value growth component. Each sector and individual choices in each sector values this differently. Land banking is based on 100% future value growth potential with very little or even negative cash flow. Generally, negative cash flow in real estate is a bad thing although a real estate investment portfolio needs to be looked at as the cash flow of the overall portfolio so negative cash flow high-value growth investments can be a part of an overall real estate portfolio. Agriculture real estate is an excellent way to be involved in good cash flow and a land bank with potential value growth at the same time. They can build more condos or houses, but they cannot make more land.

When looking at cash flow, be sure not to confuse the gross income cap rate with net income. This is often misleadingly presented by groups selling investments. Residential and commercial rentals are the easiest to calculate cash flow and are some of the lowest risk cash flow options.

In the year 2020, the net cash flow world-over on rental real estate is running very low, between 0% and 4% per year. (anyone telling you they can get more has to be looked at very carefully). Agriculture real estate usually has a long hold time and several years before the cash flow starts but often 10% and more can be achieved once the cash flow begins. Although it is in part a cash flow based on running the business, so it has more risk to the projections than most rental cash flow projections.
In today's world, 10% annual net returns are pretty appealing return and even more attractive when backed by solid land asset ownership. Agricultural land values are going up as more money is going to this comparatively good cash flow returning asset while still having solid real estate assets backing up the value of the investment. The bottom line is understanding the cash flow potential of the investment and the risks to the cash flow.

2. Understand the structure: While there is the option to own real estate individually, which is often the best option in residential as it is relatively easy to do with residential real estate. Group ownership is much more common with agriculture and commercial. There are many advantages to group ownership. REITs are a common form for group ownership and can offer greater liquidity than private ownership groups. Although often, as the group gets bigger, the returns can go lower and the private ownership groups can have the greatest returns. Big groups have a lot to invest making it difficult for them to get involved in high potential niche opportunities such as a Geisha Coffee farm in Panama. But they do offer more liquidity. Every aspect of real estate choices has trade-offs. Turn key vs. hands-on, Liquidity vs. illiquidity, future potential vs. current cash flow, safety vs. risk, more leverage more risk but possibly higher returns, also potentially more significant loss. Structures allow the individual to work with a group to accomplish things they cannot accomplish alone. They are also often 100% turnkey passive income in sectors like Agriculture where that does not exist for the individual investor.

3. What level of liquidity (or illiquidity) are you comfortable with? Real Estate is generally one of the least liquid investment options. It is a long term investment that you are committed to (or stuck with). Sure there is the buy and flip business, but that is a business and usually you are making the profits from working as a contractor for yourself for the most part, which is different than investing in real estate. When investing in real estate, often, the best money is made with the buy and hold option. Knowing when and what to buy can make a huge difference in the long term return. Anything less than five years is considered working in real estate, which is different than investing in real estate. All sectors can have excellent and very safe long term gains. Agriculture is one of the best and highest yielding areas of real estate when appropriately managed. But real estate is investing in long term value and cash flow growth this is how true wealth is built up but is not fast money.

4. Does leverage make sense: This is simple math really, and in today's world of low cap rates and even lower net returns, it often does not make sense. Leverage also adds risk to a low-risk long term sector of your investment portfolio.

When does leverage make sense? When the true net return rate is less than the cost of the leverage, usually by a margin of at least 1%. For example, Panama net return today on well-selected residential properties is about 4%, so you have to be able to borrow money at 3% or less for it to make sense. But interest rates in Panama are well over 6%, so it makes no sense to borrow and buy in Panama.

There is cross border leverage that can still make sense. For instance, if you are German and own real estate in Germany, the lending rates from banks can be below 2%. Hence, if your German property has no leverage, you can mortgage the property at 2% and use the funds to buy in Panama with a 4% return, thus netting 2% on someone else's money. This is when it makes sense to use leverage.

One has to look carefully at the type of mortgage fixed-rate mortgages being low risk and the wisest option for a long term real estate investment in today's low-interest world. But if you cannot leverage at a rate of 1% less than the NET return of what you are buying, then you want to use leverage very carefully and in a very conservative way. This has led to more structured real estate investments since a group can more easily pool funds to invest in non-leveraged real Estate safely.

Agriculture real estate usually requires millions of USD to invest in a single project, so structured deals are the best option if you do not have $5 or $10 million of your own to invest. At this time, even with residential, there are getting to more and more structured options, which can allow excellent safety by eliminating the need for leverage. However, understanding the deal is crucial and realizing that structured deals, while they can add liquidity and lower the transaction rate in many cases, they often reduce the liquidity option depending on the structure.

5. Turn-Key vs. Sweat equity: Sweat equity allows you to make more that is pure and simply because you are working and putting the value of your work into the investment. You are, therefore, investing more. But you have to consider what you get paid for your sweat equity, and often you may be paid less than your average income.

One of the best aspects of real estate is the passive income and wealth preservation aspect of investing in real estate. Structured deals are often the most passive as there is a manager for the project. But the managers are always getting paid thus your returns are diminished by the operation costs in trade for a truly passive income stream.

All turn-key 100% passive real estate investments need management. The cost of management is usually between 10% and 25% of the gross cash flow. Remember, real estate has two value growth sources a) cash flow, b) asset value growth. The gross cash flow on real estate today is often under 10%, so the 25% cost is only a 2.5% management cost, which is much less then it sounds like and often well worth it to have truly passive cash flow investment. This cost should always be factored in when doing cash flow calculations on real estate investments, even if you intend to manage it yourself. This represents your income for the work you are doing.

6. Do you like getting personal value from the investment? This goes a bit beyond "Investing" in real estate, but we have to keep in mind the quality of life and personal choices. A nuclear bomb construction building may be an excellent investment, but you may not feel that you want to choose to invest in things that lead to mass murder. A mountain cabin in Panama may not be the best yield, but if you are planning to retire in the future and would love to have such a place, it may make personal sense for you as you gain personal value as well. Still best to look at the first 5 points to see if it still qualifies as an investment or is a negative cash flow toy that you may never use and would certainly rent for way less than the "investment" in it.

These are the main 6 points of real estate investing that have to be understood and considered in any real estate investment and they do apply to most investments in General.

Agriculture Real Estate Investments:

Now we are going to look at these 6 points in more comperitive detail and how they fit into your real estate investment plan is the key to your success in real estate investing specifically in the agriculture sector of real estate:

Point #1 Cash flow with agriculture investments. I believe that real estate investments after the initial investment and value growth time frame should be positive cash flow. At first, this may seem to conflict with Agriculture investments, which often take years before the first cash flow which is the value growth time frame. The reality is that time and money are very related, and one has to understand and accept this.

By way of contrast, buying a turn-key rental takes start-up time as well although may be just a matter of months. You have to pay for the property, transfer the title, and line up the cash flow to come to you(ie find a tenant and get it rented). Since in some cases, this may be just a few months, it seems almost instant, but the reality is there is always a time factor. Buying pre-construction can yield better cash flow but may take years.

Agriculture real estate investments are more like purchasing pre-construction. The range in Agriculture is vast. Timber investment can take 30 to 60 years to start to cash flow, whereas some annual crops will begin to cash flow within 1 or 2 years. The key is to understand time and money and where you are in the investment cycle. We often start investing when we are relatively young and have many years of working life before the cash flow is an issue. Older people may be investing in the grandkid's futures. The main point is understanding your cash flow expectation and the real cash flow the investment will have. Timber is one of the best and safest agriculture investments. The seed money can grow in value by hundreds of % before its cash flows but the cash flow can be 100% annually of what was invested, starting 30 years later. Although often inflation adjusted as well. So, a $10,000 investment may produce $10,000 per year of value starting in 30 years. One of the overlooked aspects of timber is the asset value growth, which can be substantial as the trees are growing every year, adding to the total volume of the wood asset you are holding. Timber is also an excellent land bank as well since, over time, roads are built and improved, and areas develop, therefor the property values go up as well as the growing value of the timber. One main point is how it is funded for those 30 years. Loans absolutely do not work with these investments. Structured deals are most common. Make sure the group is not using leverage, so you know the investment will still be there when you expect it. Do they have reserves to manage the investment? If well-structured and manage, these can do very well. The other end of the spectrum is annual crops like pineapples and tomatoes. These can be producing income with 1 or 2 years, often a lower rate of return in exchange for a shorter time frame to net cash flow. This can be attractive but has several drawbacks, and it is very subjected to market value fluctuations of the produce, mainly since many of the products are perishable. If you do not sell your tomatoes within a couple of days of them being ready, the value goes to 0, and they are very subject to monthly weather conditions. Perfect weather produces a great crop, but this often leads to drops in price; bad weather can ruin the crop. The location of the investment is worth looking at since the equator zones tend to have fewer weather fluctuations, so tropical zones can make great areas to look for agriculture investments. Also, tropical areas today often have more opportunities to develop their agriculture sectors and more openings for investors. Timber is on the opposite range overall is not much affected by a year or two of adverse weather, and for market timing, you can leave it growing for another five or even ten years, and it just gains value so if the market prices are down you harvest less and if market prices are up you harvest more. Also, after harvest, it has an almost indefinite shelf life. A well-structured company will have storage areas, and in all agriculture investments, well-structured companies usually have processing capabilities that can add much value. When looking at the structure, you have to know what you are the owner of? Do you take part in the profits of the processing do you control the management and thus management costs as this can greatly affect your end net cash flow.

In the middle are products like fruit trees, nuts, and coffee trees, often with a 5 to 10-year development stage. This sector is also affected by the ability to process.

The key is to know your investment goals and to do the cash flow calculation. I like agriculture that involves the structure ownership that includes owning the product processing, the land, the distribution chain as much as possible. The more vertically developed the more build infrastructure the better as that gives the land value and more appreciation growth as well. Owning a vertically integrated agriculture structure offers the benefits of investing in real estate with cash flow and a business value growth at the same time.

Point #2 the structure of the investment. You can see Agriculture takes more time and investment than any other sector of real estate. Agriculture has a greater business aspect to it beyond just owning the asset. In Residential and commercial, you are involved in rental property management, and that is a business, but one that is very easy to outsource to local quality property managers. Agriculture has time-sensitive sales and possible processing and vertical integration as well. Rentals do not lose its value when it sites empty for a month or even a few months you lose the cash flow but not the core value. A tomato, if not sold in a few days, goes to $0 value. Land can be a significant component of Agriculture investments which add a huge asset value component to it. For instance, a project that has land and a resort with rental income as well as a coffee farm, and the processing and marketing are planned to be developed and owned by the investor group as well, has all the plusses of a well-structured agriculture investment. You want to look for a well thought out structure. Are the people running the farm going to run the resort? Who is going to do the marketing, who is going to do the processing? Who and how are they raising funds, and what do all these people get for doing their part, and finally, how does the investor not get screwed in the deal? If you buy the whole project and do everything, it is a job, not an investment. So, what is a good structure and what to look for in the structure?

Like investing in real estate, the structure is both simple and complex. But once you understand the components and the value points, the complexity goes away. The main element is a corporate entity that allows multiple partners to invest together in safety and to be first in line for the rewards and control. Corporate entities have bylaws, and you should read them. They should be simple and easy to understand and boarder on the side of boring. When investing, know what is the asset, and do you own it? In agriculture, the real asset is the land. If you the investor does not own-control the land, then you are funding someone else, and they own the investment. It is a real estate investment, insist on owning the real estate. Next, who manages things, what are they charging, and what control do the investors have. Usually, the managers have an ownership interest in the project. But know what that is and is the ownership incentive greater than the pay incentive. While they should be rewarded for succeeding, they should be working for you, the investor and the owner of the project. In agriculture, you want to own the assets and control the processes with an ownership interest in a vertically integrated structure. Owning a small managed plot is the first step to having an investment with almost no value and no upside potential. You usually have to pay for the management, end up selling the raw product, and have no real control of the value and no liquidity the worst of all worlds. The group that sells the plots makes money selling and managing the plot and owns the vertical integration so makes money on the business aspects of it as well, therefore they do very well, but every time they make profits, those are the profits from your investment going away. While the team working for you does need profits and incentives, the question is how to achieve the balance? If you own shares of a structured entity that controls and has the controlling ownership in all aspects of the business, you can achieve the optimal result. When you look at the structure this is the layout of what you want to find:

1. The land is the key controlling value of the investment, so the entity should own 100% of the land, and the shareholders should control that entity. i.e., the group of shareholders owns the whole plot together — not a bunch of little managed parcels where you may not even have title to your plot.
2. The central entity that you are invested in should own the controlling interest in the processing and marketing company. This entity should be separate from the landholding company, so if the primary entity you are invested in owns 75% of the shares (voting shares), then it controls the management entity. The other 25% can be held back for an incentive to the managers of the company. Often still owned by the main holding company, but the profits from that % go to management. But the investors control the management and can fire the management or make changes. Control and the majority of the profits are going to the investors.
3. There may be other added value entities such as a resort on the land, a farm management or product production company. These have a lot more flexibility as some may not the main profit centers and can be more active businesses adding value vs the main asset of the business. In the case of a resort it can add value to the products more than being the main profit center. Who owns the land it sits on is important the best option is the investors own the land and the resort has a use agreement thus they cannot sell the resort since they do not own it. It is a resort management company for the shareholders of the land and overall project. The investors may own the resort company depending on how much they invest in that entity but should have a substantial interest in it and be part of the board that oversees it. There can be similar structures for the processing, farm production management and distribution of the product. Therefor there can be more entities for different aspects of the business, but the main two are the landholding company, which the investors should own 100% of and the farm management, processing, and sales which the investors should own the controlling interest in. Then there may be the resort management company, or a cafe or wine tasting house or other side businesses that are directly related to the product or land. In all cases the real estate asset is always owned by the investors. These side companies can also provide free perks for investors, such as free stays at the resort. This can be a very attractive part of the investment but are not a fundamental part of the yield from the venture. These are more fun icing on the cake aspects of the investment.

Point #3 Liquidity: As per above structure can greatly effect liquidity, another key aspect of any investment. Real estate, in general, is less liquid than stocks and bonds but can be long term much better-yielding investments and much safer over time real estate is considered one of the best vehicles for managing and growing real wealth. The residential real estate sector is the most liquid with the commercial following in a close 2nd place. Both of these probably have about a 15% exist cost pre-tax. And can usually be liquidated in a matter of months. The next two levels are land banking and agriculture. Cash flowing agriculture is perhaps a bit more liquid then raw land bank assets, but there are many factors that play into this, such as location and the total size of the investment. Structured investments tend to be less liquid, particularly in the first two categories but can be a bit more liquid in the 2nd two categories, (i.e., land banking and agriculture). Generally, real estate is a long-term investment and performs best if held long term. Often real estate is held for generations and is an estate asset, particularly cash flowing real estate investments. Bottomline, know your liquidity requirements and know your budget cash flow requirements. Real estate assets are a great way to meet long term cash flow requirements as being asset-based; the cash flow usually goes up over time with inflation. Hence, they produce inflation-adjusted cash flow, unlike bonds and bank instruments, which, even at a fixed rate, your return is continuously going down and the real asset value is going down since the currency assets lose value over time with inflation. Agriculture investments can be a significant part of your long-term cash flow needs that can produce cash flow over your lifetime and for generations to come. They should not be considered part of an emergency fund or your liquid asset holdings.

Point #4 Leverage: Understanding the value of leverage with real estate investments when it is good and when it is bad, while leverage has its place, and when the numbers are correct it can add to your return significantly. Agriculture and land banking are the two sectors of real estate when it usually is best not to use leverage or to be very minimally leveraged. When investing in structured entities, you have to look if they use leverage. Normally, they do not, and I would stay away from any that do. The point of bringing on investors is to eliminate the need for leverage. This gives a solid asset-based investment that will never go bankrupt since there is no bank involved. Short term agriculture has less predictable cash flow than some of the other sectors of real estate, and it can have a bad year or two for a lot of different reasons. Over time it will often do better than many of the other sectors, but it has a business side and more volatility therefore leveraged can destroy the venture in one year of poor performance. If not leveraged, a low-performance year will have a low net income, but the investment continues to grow in value and the business adapts and does well over time since the main asset (the land) is still 100% good and productive. The bottom line minimizes leverage in the agriculture sector.

Point #5 Turnkey options or what is often called passive income. Investing should not be about buying a job; it is about buying passive income and growing wealth. One of the reasons the structured group ownership is a very good option for agriculture investments is that it can be a managed high yield passive income and wealth management investment. This type of investment is much different from buying the farm, so to speak, which is a job with lots of work, which can be a lot of fun and satisfaction for some people and an excellent lifestyle choice. But when focused on investing rather than lifestyle choices. For agriculture is be successful, it is tough to do it for under $1 million, and typically, the profitable entry point starts at several million after the cost of land infrastructure and management before an agriculture venture is profitable. If you have an investment portfolio of over $50 million, then completely owning an agriculture venture as 10% of your portfolio can work since that would be $5 million. But for the average investor often works with a portfolio of around $1 to $2 million, they may want to put only $100,000 or $200,000 into agriculture and investing in a structured group project is the optimal choice. It can then be turn-key passive cash flow real estate investment and adds magnificent diversity to a real estate portfolio.

Point # 6 Personal value from the investment: Often referred to as lifestyle investments. This is a very fine line. Is your focus lifestyle or investment income. While an investment can be both, it is best to be very clear on the value that is given to each aspect of the investment. Also, to make sure you do not end up with an investment that underperforms because of the lifestyle aspect and then does not perform as a lifestyle investment because of the focus on profit. Hence, you get neither a good investment nor a nice lifestyle investment with a personal value aspect to it.

How does the concept of personal value tie into agriculture real estate investing? Think of investing in farming and providing food and things to drink to people vs. building guns and war machines to kill and create destruction to people. This aspect does not involve any personal use-value but investments that support your beliefs. Even within Agriculture, there are big commercial farms full of toxic chemicals that are slowly destroying the soil and the more sustainable farms or the 100% organic permaculture projects. In part, depending on the level of your choices, you may be contributing a part of your portfolio potential returns for changes that you believe in. Often you can get good returns and be invested in a very socially positive way. Agriculture of all the sectors of real estate investments tends to fall into this category as feeding the world on any level tends to be a positive thing in general. It is pretty easy to feel good about what your investments are supporting while getting a good passive income and preserving and building your wealth with agriculture

Personal use-value, ie free stays resort stays available to you the investor, Airbnb vacation property investments, and such, future retirement property. This is less common in agriculture investments, but some types like vineyards and coffee estates lend themselves to having boutique small exclusive resorts on the farms. This is most common in the ones that have a high-end product. These usually do not add significantly to the overall cash ROI but can be a very nice personal use feature. Like a vacation timeshare that pays you to come to visit rather than charging you every year as well as being a great way to visit the farm to see how things are going firsthand and enjoying a great vacation at the same time. This can be a very nice added personal value. If you invest in vacation real estate properties, this is more common as you can use your property whenever you want although that can adversely affect your return. This is also a factor when buying a rental in an area where you would consider retiring in the future. It can produce a good ROI, and later, you can live there if you chose to.

Real Estate and all types of investing are much more international available than they were 20 years ago. Nowadays, it is pretty easy to learn about options anywhere in the world. One of the things you want to look for is a stable government. Europe and the US often are the first places that come to people's minds, but the smaller developing countries often have better opportunities as there is less money chasing any available options. Places like Panama is a small developing country that is the lead country of the region. It is very developed on many levels with a very stable government and is protected by the developed world due to the importance of the canal. Panama is the Switzerland of the western world. Wealthy countries tend to be more stable as well, and Panama gets a significant income from the Canal and from being a logistics hub for the world. This allows it to have a higher level of social services while maintaining a low country tax rate. This stability has led Panama to be the regional business hub of Central America as well, which again adds overall stability to the country. Few countries still have desirable investment opportunities like Panama and have the same level of development, growth, and stability.

One of the investment opportunities in the agriculture sector now available in Panama with all of the key features that make an excellent investment opportunity is Boquete Coffee Estate.