Brian and his company own and manage farm land, which they purchase along with investors. He will cover the main benefits of investing in farmland (cash flow and appreciation) as well as the secondary benefits. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Anything that you’re spending money on, if it’s quality, there’s going to be someone who wants to pay more for it down the road than you paid for it” – Brian Luftman
Brian Luftman Real Estate Background:
- Founder and President of American Farm Investors
- AFI now manages thousands of cropland acres as an investment for accredited investors from 25 different states in the U.S.
- Based in Lexington, KY
- Say hi to him at https://americanfarminvestors.com/
- Best Ever Book: The Art Of Leadership
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TRANSCRIPTION
Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I will be speaking with Brian Luftman. Brian, how are you doing today?
Brian Luftman: I’m doing well. How are you, Theo?
Theo Hicks: I’m doing fantastic. Thanks for coming on the show, and I’m looking forward to our conversation and learning more about your real estate background.
Brian is the founder and president of American Farm Investors (AFI), which manages thousands of cropland acres as an investment for accredited investors from 25 different states in the U.S. He is based out of Lexington, Kentucky, and you can say hi to him at americanfarminvestors.com.
Before we begin, can you tell us a little bit more about your background and what you’re focused on now?
Brian Luftman: Sure. My background is almost exclusively financial. I always wanted to be a trader in Chicago, and that’s what I did right out of college. I was a derivatives trader on the Chicago Mercantile Exchange; I traded cattle options.
Then how it parlayed into the farmland company that I run – I was looking for a passive farmland investment while I was still in Chicago, because I wanted an inflation protection and a real asset, that would be able to provide cashflow, and I couldn’t find anyone to help me buy into a farm, or to be a private equity consultant, so to speak…
So I kind of filed that in the back of my mind and knew that that’s what I wanted to do after trading, and thus American Farm Investors was born. I now manage a lot of farmland acres for a lot of investors throughout the country.
Theo Hicks: For those that don’t necessarily know what cropland is and how it generates money and what’s done on that land – like me – would you mind quickly giving a high-level overview of the business plan?
Brian Luftman: Certainly. I’ll go back to the beginning on why I was interested in it in the first place – because it was really an inflation play; I wanted to bet on commodities, and I figured why not own land that grows commodities? You can invest in farmland in many different ways; you can buy an almond farm in California, or in Orange Grove in Florida, but I wanted to buy grain-producing farmland in the Midwest, because it’s pretty affordable. We buy land for 5k, 6k, 7k/acre. We produce corn, wheat, soybeans, industrial hemp… And basically, as an investor, you have the benefit of owning the underlying land, of course, and that goes up in value anywhere from 5% to 7% annually; if you look back 100 years, that’s the average, 5%-7%. It comes in waves; when there’s big inflationary cycles it goes up in a hurry, and then years like the last 10 years we haven’t seen much appreciation in farmland. So it’s kind of been stagnant, at least over the past five years. Then the cashflow is a component as well.
The real reason you invest in farms is for the appreciation, but the cashflow is tied to inflation. We produce corn, wheat, soybeans, and those are commodity crops. My investors get anywhere from 3% to 5% cashflow a year. That’s kind of the investment thesis.
The real thesis is if you believe that inflation is going to occur – and I believe it’s gonna possibly occur in a big way – this is a great way to bet on that, and be hedged for inflation.
Theo Hicks: Okay. Essentially, the primary objective is that inflation, and then a secondary benefit would be that cashflow you provide. So is the goal to eventually sell that land and then distribute a lump sum profit to your investors?
Brian Luftman: Sure. More or less. But most of the investors have a pretty long-term outlook on this. And if indeed inflation does occur, and commodity prices go up, and these farms are generating 5%, 6%, 7% returns, maybe they’ll just wanna hold on to the asset as a cash-producing asset.
There’s definitely the option to sell the properties down the road, but I don’t know; a lot of my investors are pretty long-term with this.
Theo Hicks: Okay. How do you underwrite these deals?
Brian Luftman: It’s very simple – we’re looking for the very best dirt, and you do a whole lot of assessment on how productive a farm will be. There’s a lot of tools that we can use in the industry. We use farmers a lot in the region, because farmers in that region all know where the best farms are, how to assess the properties, what pitfalls could occur, what type of capital expenditures might be coming down the pipeline when you buy a property.
We have a team of people that help us in analyzing these farms, and we haven’t really found many surprises. You’re really just buying farmland dirt, more or less. Sometimes in buildings there’s drainage involved, or logistics, but essentially it’s pretty simple, and the underwriting is how productive we think the farm will be over the next ten years.
Now, obviously, I do wanna add in that the location is an important component as well, because we’ve seen higher and better uses for some of our farms. We may be farming them now, but we think they might be developed down in the future; if that comes into play, we’re willing to pay a premium for stuff that’s on a busy road, or nearby development, because we know that that will help boost the return someday for the investors as well.
Theo Hicks: That’s interesting. I didn’t think about that. So you’ve kind of got multiple plays going on at once.
Brian Luftman: Correct. In some cases. Now, sometimes we buy a farm in the middle of nowhere that’s got very good productivity and we’re happy with that, knowing it’s gonna be a farm forever.
Theo Hicks: How do you find these deals?
Brian Luftman: Just hustling. I mean, I shouldn’t say it that way, but it’s just constantly digging, it’s cold-calling, it’s going to the PVA office (property value administrator) and seeing who owns what, driving around, networking with the farmers in the region that we wanna acquire land… And the farmers help us a lot. Our best tenant farmers — we use a lot of the farmers that grow corn and wheat for the bourbon industry here in Kentucky. A lot of our properties grow for Maker’s Mark, Jim Beam, Buffalo Trace Distilleries. These are some of the biggest ones in the country, and we provide corn and wheat for those.
So our farmers are big-time, and they’ve got a big footprint, they farm multiple counties, and they know all the landowners. [unintelligible [00:08:06].20] when they wanna expand, they don’t really necessarily have the capital to buy more farmland, but they wanna farm more farmland; so they call me, they say “Brian, you buy it. We’ll farm it.” So it’s a good relationship we have with all those tenant farmers in the region.
Theo Hicks: Are you raising capital for these deals, or are you funding them yourself?
Brian Luftman: Mainly raising capital for them, but I invest personally in every deal that we have ever done, and I will continue to do that. I like to have skin in the game along with the investors, and I’m a partner in the deal like everyone else. And they’re on a deal-by-deal basis. So we don’t do a fund, we like doing each deal — whenever we find a farm or multiple farms in a region, we’ll put a deal together around it. It will have one finite group of partners, and they all know who each other are. Not intimately, but they know their names and how to contact each other.
It’s just that really simple way to do business, and that way it’s a majority do if we ever need to make any decisions on the property, and it’s not necessarily that we control the deal outright as the manager. It allows it to be more like a partnership deal. But they all look to our firm for all the guidance on what to do and when to do it… But there are mechanisms in place where they could even remove us as the manager, even though we put the deal together,
Theo Hicks: Okay. So do you have the same investors who will invest in every deal, or are you kind of going out and finding new investors? Either way, whether the same ones or new ones, how are you finding these investors? Is there anything unique about presenting farm deals, as opposed to some other real estate investment that you’re raising capital for?
Brian Luftman: Sure. A lot of it is people doing their own Google searches and searching out “private equity farmland manager.” I don’t really have any competition in this space. There’s a few other firms that do this, but very few will do it for the lower minimums, like we do. For that matter, if someone’s looking for what we do, we’re kind of the answer. There’s not many other companies; if someone wanted to invest say 50k or 100k or 200k into a farmland deal, there’s very few options.
So with people searching it out themselves – which we love; those are the most loyal clients… They found us, we didn’t sell it to them; they wanted to put farmland in their portfolio, and they’d done the thinking and the work to understand why they wanted farmland, and they came to the same conclusion that I did – they wanted inflation protection, a real asset, they wanted a non-correlating asset; something that will do well when the economy is doing poorly.
So those are really loyal customers and clients, and they actually tell their friends. So it’s been a little bit of a network effect on how people — not a network effect, but just kind of a web that’s growing of the people that like to invest in these deals. Does that make sense?
Theo Hicks: Yeah, that makes sense. I know for Joe’s syndication business that’s his number one way of getting new investors – that referral network.
Brian Luftman: Right. Obviously, we do public relations a little bit; we had an article in U.S.A. Today, the money section, a couple years ago… That got some really good outreach and a lot of people learned about us through that. Then podcasts like this, so I appreciate you having me on. I think if it strikes a chord with one of your listeners, they can call and maybe they’ll become a loyal client if they like it. It’s not for everybody, farmland investing; it’s a low return.
People can get much better than the 3% cash return in the market, I’m sure. Many of the podcasts that I’ve listened to on Joe’s and your podcast have much higher returns that ours, but ours fits a niche, for a reason, and we have people looking for us, too.
Theo Hicks: Yeah, I actually have a neighbor who — I’m not necessarily sure what the company name is, but he works for a pretty big bank, and he works on their farm division… So he buys land down here in the Florida area, and in the Midwest, too. So now I’ve got more information and I can talk to him about that, because I know what I’m talking about now.
Brian Luftman: Absolutely. You can teach him some stuff.
Theo Hicks: There you go. So do you mind walking us through specifics – the acquisition costs, just any numbers surrounding a recent deal, your best deal, or your first deal, and kind of just walk us through some of the numbers.
Brian Luftman: Sure. It’s really simple. Basically, our first deal looked a whole lot like our recent deal, and I’m really proud of that. We structured this perfectly right out of the gate, and we’ve just kind of hit the Copy button [unintelligible [00:12:04].08] to do each one… Because it’s really simple – we buy a farm that we hope will cash-flow a gross return of somewhere between 4% and 5%. We used to do better than that when grain prices were higher, but they’re not right now. Coin and wheat and soybeans prices are very low, for multiple reasons. There just hasn’t been inflation, commodity prices are down in general. Oil – I mean, you’re paying below $3, below $2,50 in some cases at the pump right now, and that’s a deal. So our cashflow is not really great. But the 4% gross, and then basically our expenses out of that – we don’t even take 75 basis points as a manager fee… And then there’s other costs associated, and then that return ends up being about a 3%, if that makes sense. So it’s as simple as that. If we did a ten million dollar deal, we can lease those acres out to farmers to generate about $400,000 worth of income; all the fees, and costs, and legal, and everything else amounts about 100k, and then 300k is distributed to the investors. Does that make it as simple as possible for you?
Theo Hicks: Yeah, that is simple and straightforward.
Brian Luftman: Yeah. So if someone invests a half million dollars in that deal, they own 5% of it, they would get 5% of the 300k, and it all works out. And then they’d get 5% of the upside on the sale.
Theo Hicks: Are you buying this with all cash, or is there a bank involved?
Brian Luftman: Yes, all cash. We like it that way, it’s incredibly simple. There’s a little bit of a doomsday component when you invest in a farm. It takes a person that’s a little bit thinking on the doomsday component, like “Hey, if everything else fails, I’ve got a real asset.” Those type of folks – that’s not all of our clients, but they like to have an asset with no mortgage debt on it whatsoever, and own it outright.
Theo Hicks: You’ve gotta know your customer.
Brian Luftman: Exactly.
Theo Hicks: Alright Brian, what’s your best real estate investing advice ever?
Brian Luftman: It’s simple, I think it’s quality. That can boil down to the quality location, or quality building, or quality farmland. It doesn’t matter what you’re in. And that doesn’t even have to be for real estate; in anything that you’re spending money on, if you own something that is quality, there’s gonna be someone who wants to pay more for it down the road than you paid for it… And I’ve put such a premium on buying the very best of farmland, because I’ve seen it already. We’ll overpay for something because it’s in a phenomenal location, and the next thing you know, someone wants it more than I did.
Theo Hicks: Simple, but very powerful advice. Are you ready for the Best Ever Lightning Round?
Brian Luftman: Yeah, I am.
Theo Hicks: Alright. First, a quick word from our sponsor.
Break: [00:14:35].27] to [00:15:21].21]
Theo Hicks: Alright, what’s the best ever book you’ve recently read?
Brian Luftman: A friend told me to read Max De Pree’s The Art of Leadership, which is an old book… And I was sunk into it with one of the first lines, which said “The first responsibility of a leader is to define reality, and the last is to say thank you.” I loved it. I was like “That’s so elegant; really just boiling it down to defining reality is so important in life, and so few people have that art or that skill, so… I really like that book. It was powerful.
Theo Hicks: If your business collapsed today, what would you do next?
Brian Luftman: I’d start a new business. I’m so entrepreneurial… I just love starting businesses, and I would find whatever was next very quickly, because I love running my own business, and doing it my way, and trying to add value to other people as well.
Theo Hicks: If you were starting in farmland investing today and you had little or no capital, how would you grow that business?
Brian Luftman: I guess I’d do exactly what I did ten years ago, which is… I didn’t have much capital to do it, but you find a great property that you can put a deal around – and I think this goes for anything in real estate… If someone wanted to get into commercial private equity purchasing to build a big commercial private equity fund, all you’ve gotta do is find the first really good deal, get excited about it, and then start selling it to people that have a little bit more money than you do, and the next thing you know, you’re up and running. That’s what I did with farms, and I think that’s a great recipe for success in real estate. I think it’s “Find a great deal, and then get people excited about it to invest with you.”
Theo Hicks: What is the worst deal you’ve done?
Brian Luftman: I guess the smaller deals… I get excited about finding value in something that’s small, and I’m excited about it because it’s a good value, but it ends up being more of a nuisance. I’ve bought a couple of smaller farms, and they’ve been good performers, but they’ve taken a lot more of my time than the bigger ones have, and financially speaking or time-wise it wasn’t necessarily worthwhile… So I’ve tried to stay a little bit bigger and tried to focus on spending time in the right way.
Theo Hicks: And lastly, what is the best ever place to reach you?
Brian Luftman: It’s gotta be my website, americanfarminvestors.com. My email is on there, and I welcome anyone. If you ever have a farmland question or wanna learn more about this, just shoot me an email and I will respond. That’s the best way to get me.
Theo Hicks: Alrighty, Brian. Thanks for coming on. This has been a very fascinating conversation, learning the ins and outs of investing in farmland… Just to kind of quickly summarize what we discussed – we talked about just the overall business plan of investing in farmland, which is it’s primarily an inflation play, where you’re investing in land that grows commodities, in your case farmland that’s producing grains. We talked about, on average, the value of the land has grown 5%-7% each year historically.
And then secondarily it’s the cashflow play, which is between 3% and 5% each year. We talked about how you underwrite the deals – essentially, you’re looking at how productive the dirt is gonna be over the next ten years, and you rely on farmers, because they’re the most knowledgeable of the business, so they help you with the analysis.
We’ve talked about how you find a deal, and you said it comes down to hustling – cold-calling, going to the PVA office, networking with farmers, and obviously having farmers who know you reach out and say “Hey, you buy this land and we’ll farm it.”
We talked about how you raise capital for farmland deals – you don’t do [unintelligible [00:18:39].04] it’s more of a deal-by-deal basis. The most loyal customers are the ones who are doing that Google search and are actually looking for those kind of investments. You don’t really have much competition in this space, so if they google search, then you’re the answer. You also find investors through those referrals, and then some PR – you had an article in U.S.A. Today, and you also go on podcasts.
Then we discussed your first deal, which as you said, is very similar to your most recent deal; it’s kind of a copy and paste strategy, where you buy farmland that will have a gross return of 4%-5% each year. You buy a ten million dollar property, you gross about 400k; after about 100k in expenses, you’re left with 300k in cashflow. And you do not do banks, you buy these properties all cash.
Then lastly, you gave your best ever advice for real estate investing – and just life in general – which is if you’re spending money on something, make sure it’s high quality, because someone’s gonna pay more for it down the road if it’s that high quality.
Again, Brian, thanks for coming on the show today, speaking with us about farmland investing. Thanks to everyone who listened. Have a best ever day, and we’ll talk to you soon.
Brian Luftman: Thanks, Theo.
