CHILE UPDATES #30
Agricultural Rental Yields vs Residential Rental Yields
in Central Chile
Agricultural Rental Yields vs Residential Rental Yields
in Central Chile
I always find it surprising when people tell me how they prefer residential real estate over agricultural real estate when it comes to their passive income investment portfolios.
Some of the arguments I hear people make as to why they feel this way include:
1. They understand residential real estate better than agricultural real estate.
2. Buying and finding a renter is easier.
3. Yields tend to be higher.
At face value, these arguments would be hard to disagree with.
When you dig a little deeper though and really look at the mechanics at play for each type of investment, you might come to a different conclusion.
Let's consider argument number one.
I often times hear people here in Chile say they feel a lot more comfortable investing in residential real estate than in agricultural real estate because they don't have any experience with farming.
Some even seem to think that in order to be any good at investing in agricultural land, they need a degree in agronomy and their own laboratory for doing soil analysis.
What these people don't know is that decades ago, almost all the agricultural land in central Chile was surveyed and and classified into four distinct categories (with Class 1 being the highest quality with very few limitations down to Class 4 which is considered the lowest quality agricultural soil).
This information can be obtained quite easily and makes agricultural real estate investing in central Chile much easier than in other parts of the world.
Also worth noting is that planting 10 acres worth of crops is a lot different than renting that land out to an experienced farmer who is going to plant 10 acres worth of crops.
Now how about argument number two.
It's true, if you currently live in an urban area, walking down the street or driving 10 minutes across town to see a new listing is going to be easier than driving 30 or 40 minutes out into the countryside to see a new farm for sale.
However, judging an investment by how easy it is to get into it really doesn't make the most sense.
I don't know about you but I've always been able to bank the best returns when I've been willing to do some extra due diligence and go the extra mile.
As for renting out agricultural real estate, one of the first things to try is talking to people living in the immediate area. They can often times be extremely helpful with finding a renter. If this doesn't work, you can always put an ad in the local papers, a sign up on the actually parcel, or list it with a local agricultural real estate agent.
Finally, let's take a look argument number three.
While it's true that the nominal percentage yield for residential real estate is almost always higher than for agricultural real estate, savvy passive income investors know there's more to the story.
I honestly can't tell you how many times I've seen people forget to take into account the “hidden” costs and hassles of renting out residential real estate.
Fixing leaky faucets, collecting rent every month (rent for agricultural real estate in Chile is almost always paid up front annually), doing credit reports on potential renters.
The list goes on and on.
The biggest thing I see people miscalculate when comparing these two different kinds of real estate investment, however, is depreciation.
When demand for housing in a specific area increases, or when labor or material costs rise, it's possible to see some appreciation with residential real estate.
Eventually you pretty much always have to take some depreciation into account which is one of the most important differences between evaluating long term agricultural and residential real estate yields.
For some passive investors, residential real estate might still be the best option but it's important to remember that “common knowledge” about each might not always be the most accurate.
Some of the arguments I hear people make as to why they feel this way include:
1. They understand residential real estate better than agricultural real estate.
2. Buying and finding a renter is easier.
3. Yields tend to be higher.
At face value, these arguments would be hard to disagree with.
When you dig a little deeper though and really look at the mechanics at play for each type of investment, you might come to a different conclusion.
Let's consider argument number one.
I often times hear people here in Chile say they feel a lot more comfortable investing in residential real estate than in agricultural real estate because they don't have any experience with farming.
Some even seem to think that in order to be any good at investing in agricultural land, they need a degree in agronomy and their own laboratory for doing soil analysis.
What these people don't know is that decades ago, almost all the agricultural land in central Chile was surveyed and and classified into four distinct categories (with Class 1 being the highest quality with very few limitations down to Class 4 which is considered the lowest quality agricultural soil).
This information can be obtained quite easily and makes agricultural real estate investing in central Chile much easier than in other parts of the world.
Also worth noting is that planting 10 acres worth of crops is a lot different than renting that land out to an experienced farmer who is going to plant 10 acres worth of crops.
Now how about argument number two.
It's true, if you currently live in an urban area, walking down the street or driving 10 minutes across town to see a new listing is going to be easier than driving 30 or 40 minutes out into the countryside to see a new farm for sale.
However, judging an investment by how easy it is to get into it really doesn't make the most sense.
I don't know about you but I've always been able to bank the best returns when I've been willing to do some extra due diligence and go the extra mile.
As for renting out agricultural real estate, one of the first things to try is talking to people living in the immediate area. They can often times be extremely helpful with finding a renter. If this doesn't work, you can always put an ad in the local papers, a sign up on the actually parcel, or list it with a local agricultural real estate agent.
Finally, let's take a look argument number three.
While it's true that the nominal percentage yield for residential real estate is almost always higher than for agricultural real estate, savvy passive income investors know there's more to the story.
I honestly can't tell you how many times I've seen people forget to take into account the “hidden” costs and hassles of renting out residential real estate.
Fixing leaky faucets, collecting rent every month (rent for agricultural real estate in Chile is almost always paid up front annually), doing credit reports on potential renters.
The list goes on and on.
The biggest thing I see people miscalculate when comparing these two different kinds of real estate investment, however, is depreciation.
When demand for housing in a specific area increases, or when labor or material costs rise, it's possible to see some appreciation with residential real estate.
Eventually you pretty much always have to take some depreciation into account which is one of the most important differences between evaluating long term agricultural and residential real estate yields.
For some passive investors, residential real estate might still be the best option but it's important to remember that “common knowledge” about each might not always be the most accurate.