Posted: Wednesday, January 25, 2023
Author: Matt Henningsen, Ranch Sales | Licensed in MT
As an educated investor, you know that proper asset allocation is essential to portfolio diversification, and of course, real estate has always been a mainstay of a well-balanced portfolio. However, the recreational, agricultural, or working land niche market has only recently gained attention as an alternative to more traditional real estate assets. For decades, recreation and lifestyle have been a primary focus of new investment in western ranches. This is fueled in some measure by Hollywood’s romanticization of the American West in films such as A River Runs Through It, Legends of the Fall, and, most recently, Paramount’s Yellowstone. Still, ranch ownership represents more than what is portrayed on the big screen. When you purchase a ranch, not only are you acquiring a place to enjoy with family and friends but an asset with broad, deep, and resilient value.
Historically, western ranches were valued through the narrow, albeit objective view of how many cows the land can support, expressed in price per Animal Unit. For example, if Ranch A could support 100 cows year-round, and ranches in that area sold for $10,000.00 an Animal Unit, Ranch A should be worth $1,000,000.00. Financial modeling was straightforward, and the returns were predictable enough to pencil out a ranch purchase off the back of a cow. Back then, ranch ownership required skills and knowledge that were commonplace, and good help was easy to find. Today, ranch values continue to be loosely indexed to cows, expressed in price per acre, but modern ranch investment reveals multiple value layers, and price per acre now includes a whole lot more than just the practice of the bovine arts. From the revenue streams generated by agricultural operations to the quality of the opportunities to hunt and fish or the overwhelming emotional feeling created by a particular view, objective and subjective values are now strategically considered in forming an investment thesis for a ranch property. Additionally, nascent value layers like carbon credits generated from improved land management practices are now beginning to be realized. Sophisticated models are being employed to drive value-add projects on land holdings, unleashing exciting opportunities in the ranch asset space.
Wealth Preservation: Long gone is the opportunity for the entrepreneurial adventurer to wander into the vastness of the American West with nothing more than a horse and a rope and amass new fortunes as a cattle baron. The land is no longer free, and the old cliché holds: they aren’t making more of it. With capitalization rates hovering near zero, the purchase price relative to the annual net revenue of the average operational ranch asset can seem off-putting as a real estate investment to someone used to the higher cap rates associated with holdings like storage units or apartment complexes. That said, with land’s historically low volatility and reliable long-term appreciation, ranches that can generate enough revenue to cover property taxes, insurance, and basic property management as a baseline, have consistently outpaced inflation over the long haul. Holding a ranch then can feel like holding a fine art collection that pays its own insurance and storage costs. With relatively high barriers to entry and competition for a finite resource, ranches are unique in the real estate asset class, behaving more like rare classic cars: Art with utility.
Growth: Securing tangible assets that hold value in the face of market turmoil and outpace inflation has long been the diversification strategy of savvy investors. However, even gold, the king of tangible assets, doesn’t grow. The Oracle of Omaha sums it up best: “…the one thing I can tell you is [gold] won’t do anything between now and then except look at you” — Buffett, CNBC’s Squawk Box, 2009. Similarly, sports memorabilia, and fine art, are in the same boat. Ranches, however, can grow beyond just buying more land, and there are many dividends beyond the traditional revenue streams of selling hay and cows.
Aggregation is the obvious route to growing a rancher’s spread. Interestingly with ranches, assembling adjacent land over time and reconnecting ecosystems to function despite fence lines can create value greater than the sum of its parts. It’s like owning that rare vintage sports car, but your neighbor owns the original hood ornament. Putting the ornament back on your hood improves the value of both pieces. On the other hand, and in addition, implementing improved management practices can also get your land to do more than “just look at you.” For example, advancements in modern livestock management have proven to dramatically increase productivity by focusing on the natural relationship between ungulates on perinneal grass landscapes. Carefully balancing the number and timing of livestock grazing to mimic nature can repair soil health, improve water systems function, and even sequester carbon over time. A “take five to save ten” approach may seem counterintuitive. However, when considered on timelines greater than a decade, decreasing production, in the beginning, can return an ecosystems function on working ranch lands to levels not seen on that land in a century, thus resulting in ultimately increasing the livestock carrying capacity of the land, often measured in multiples of the original amount. Imagine owning an apartment building where the tenants built more apartments for you for free while paying you rent.
Utility: Raw land, located in the path of development, that is developed to its highest and best use, and valued for its utility to the end user, has been, and still is, one of the cornerstones of real estate investment and the root premise driving subdivision. Unfortunately, the disappearance of the working ranch as car dealerships replace cow pastures is one of the great tragedies of the American West. But like a hero’s journey, the western ranch is on the road back with new models to accommodate the reorientation of values in the marketplace. No more is ranchland’s highest and best-use a place to store cows until it is eventually devoured by urban development. Clean air, clean water, healthy food, happy families, intact communities, and meaningful lives lived now drive the bus, and ranches can provide all this and more. Owning a place where you and your family can relax, recreate, and share meaningful experiences while escaping the chaos of the modern world has tremendous value in this day and age. Stewarding programs employed to effectuate improved ranch economics while being completely compatible with improved environmental outcomes is incredibly rewarding. Uninterrupted views across open space where fish and wildlife spill over into the public domain is a dividend everyone enjoys. The ability to harness the wind that blows above the ground or the sun that bathes all of it represents real value. Whether harvested with a windmill, solar panel, or with blades of grass eaten by livestock, the renewable energy that can be captured on a ranch in one form or another is the ultimate golden goose. Nontraditional revenue streams are now regularly realized. From such ranch enterprises as hunting leases to wedding venues, the traditional ranch model has been reimagined to leverage ranch attributes and resources to compete in today’s upcycle economy.
The ranch market is realizing an increasing investor pool like never before, and at a time when the ranch asset is becoming ever more scarce. A reorientation of cultural values creates demand for ranches to be kept as working lands, employing new models of investment that achieve long-term economic results through ecological incentives. Aggregation, not subdivision, is moving acres out of the ranch asset market and locking them up for the long term, creating scarcity and helping to drive appreciation.
Whether you start by owning the hood ornament or the whole El Camino, the ranch asset space is replete with opportunities to create value, hedge against inflation, generate returns, preserve wealth, and improve the quality of life for countless people in addition to your own. Lastly, the 1031 exchange and the conservation easement are well-suited tools to help transition into the ranch asset space and achieve tax advantage in addition to those advantages commonly understood with other tax deferment tactics. The ranch asset is mysterious to many, which may be part of its appeal, but the body of knowledge necessary to navigate this asset class is not unsurmountable. With access to information improving by the day, and plenty of qualified people entering the landscape to manage your asset, the western ranch is an investment you can truly enjoy for generations.
If you are interested in diversifying your investment portfolio with land, visit Fayranches.com to search for the perfect property for you and your family.
