Rural Real Estate, Why Investing Makes Sense.

We continue our series of looking at the rural real estate markets.  We’ve talked about the recovery and the sectors of the market that remain difficult.  This week we look at why investing in rural real estate, specifically Ohio, West Virginia, and Pennsylvania makes sense.

Just in a general way,  investing in the rural real estate market in America offers some distinct advantages over urban real estate investing.

  • There are fewer investors competing over properties. Investors do not have to work as hard to find a deal. In some cases, the deal finds them.
  • Properties are less expensive. One professional said that his average property value (2013) in rural New York State was $73,000.
  • Properties that “cash-flow” well can be found because of the lower cost and fewer competitors.
  • There are fewer regulations, lower taxes, much less crime.
  • It’s easier for your company to build a brand presence in smaller communities. It’s easier to develop visual appeal.

On the other hand, rural real estate is harder to sell or rent because of the smaller potential customer pool. Some kinds of investing strategies, like buy-and hold, don’t work well. There is very little business support. It may be harder to find a property manager and business services and supplies. Rural communities dependent on a few employers may be unstable. There are some special cultural rules in small towns that you have to pay attention to. Rumors pass quickly so reputations can be damaged overnight.

According to the U.S. Department of Agriculture (USDA) [Land Values Summary, 2015, pdf], the value of farm real estate has been a steady increase since 2010, from under $2,000 per acre in 2010 to around $2,700 per acre in 2015. State by state, the increase are uneven. From a nearly 2 percent decline in New Mexico to a maximum increase of over 11 percent in New York State. Cropland prices show a somewhat steeper increase from around $2,500 per acre in 2010 to about $3,500 per acre in 2015. The distribution of cropland price increases is different from general farm property increase. Texas and California show the biggest increases in cropland prices. Cropland in California costs almost $11,000 per acre in 2015.

According to some investors, rising rural estate prices can depend on how far from large urban centers you are. Some of the increased value of rural real estate is that it is changing into suburban real estate as the cities expand into the countryside. In an article for Investment U, investor, David Fessler describes how he accumulated 67 acres of rural farmland for $117 thousand, and how it increased in value quickly.

“During the last residential real estate boom, local homebuilders built big houses on one-acre lots….Almost overnight, prices in my area skyrocketed. The land alone on my property is now worth about $750,000.” With the house, outbuildings and “…don’t forget the ‘sweat equity’ I added over the years….I wouldn’t take less that $1.1 million. [and] If I wanted to, I could create 15 to 20 one-acre home sites on my property, completely out of view of my house.”

This condition of land value increase due to suburban sprawl appears to be generalizable in many rural communities within commute distance of major centers.

However, the value of cropland is also increasing substantially, especially in locations where crop farming is a well-developed industry, like California.  In the U.S., since WW II, the value of farmland has risen nearly every year. The housing bubble residential real estate collapse did not affect the value of rural real estate. The USDA figures do suggest a leveling off of the increasing trend during the housing bubble crisis years, with the increase quickly re-starting after 2010.

A majority of recent farmland buyers have been farmers increasing their land holdings using cash with no lending institution leverage. Record commodity prices have allowed farm operators to expand in recent years. The fundamentals for farmland are very different from residential or commercial real estate.

  • The need for food production is rapidly increasing because of increasing populations in the U.S. itself and in export markets.
  • Rural real estate, especially farmland use expands as the urban population looks for leisure opportunities in rural communities. The US Fish and Wildlife Service estimates that Americans spend $145 billion on hunting, fishing and outdoor recreation. These figures suggest a growing potential for land use expansion.

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