Post the 2008 crisis, property prices fell around the world, dramatically in some cases. Still, rental yields in many markets worked out to less than our 5% to 8% threshold, even when figured against post-bubble property values. Worthwhile cash-flow rental opportunities, which, until the global property boom reached its peak, had been our primary investment focus, were hard to find.

In 2009, we turned our attention to agriculture. We've always been fans of land and trees. Until this point, though, we hadn't identified a way to earn turnkey cash flow from them.

Agricultural land on which to grow cash crops, fruit trees, grape vines, or timber will always hold value, because the world is always going to need those things. Population growth (the human race is expected to increase by 2 billion people to reach nearly 10 billion by 2050) and limited and shrinking amounts of arable land (the earth has lost a third of its arable land due to erosion and pollution in the past 50 years) are combining to create a global food crisis that is going to grow more severe in coming years and decades, making productive land the ultimate hard asset.

By definition, productive land is an opportunity to produce something of marketable value, meaning, unlike a lot in a development community or a plot in the middle of a commercial district, productive land always retains the potential for yield. When whatever you plant or herd reaches maturity, you have a highly in-demand product to sell.

Many in today's investment world are talking about farmland as the new asset class. It isn't. It's the world's oldest asset class. The old real estate investment adage recommends buying beachfront because they're not making anymore of it. The limited supply and fast-growing demand make farmland at least as strong a store of value long term.

The trouble is we're not all interested in becoming farmers. That's okay because, although this can be about farming, you do not have to be willing to roll up your sleeves and pick up a hoe to earn cash flow from crops. Over the past decade-plus that we've been focused on this cash-flow strategy, we have identified three ways to play it for as much as double-digit return over decades and even generations.

Uruguay—The World's Best Place to Earn Cash Flow from Farmland

Looking at a world map, three places are most interesting in this context: Africa, Eastern Europe, and South America. Among the three regions, South America is the most competitive; Africa and Eastern Europe are more volatile, with more corruption, lack of clear rules, and restrictions on foreign ownership. In South America, Uruguay, in particular, stands out; about 95% of the land in this country is farmable. Until the start of this century, most of Uruguay's land was used for cattle. When farmers began to recognize the implications of the coming global population crisis, they switched from cows to soybeans (and other crops). Because Uruguayans haven't farmed their land for 200 years, it's virgin. There's been no soil degradation, as in more recognized global breadbaskets.

Foreign and local investors are treated the same in Uruguay; there are no restrictions on foreign ownership or use of land. No exchange controls or currency restrictions either. Uruguay is a foreigner-friendly, investor-friendly place and, as a result, has enjoyed the highest rate of foreign direct investment per capita of all Latin America for the past three years.

Uruguay sees even rainfall year-round, plus the country sits on the world's largest untapped aquifer. The climate is temperate, with four mild seasons. Farmers can raise two crops per year.

Uruguay's farmland market is transparent. The entire country has been surveyed for productivity levels. Each land parcel has an ID number. You can plug this number into a map (available online: www.prenader.gub.uy/coneat) to see the productivity rating for whatever piece of land interests you. The system amounts to a multiple listing service (MLS) for farmland quality, making it uncommonly easy to compare all your options at once. The average productivity rating for the country is 100. A lower rating means you're looking at land that's really suitable for running cattle only. You want land rated 120 or 130 or better. Price correlates to productivity rating.

What could you produce? Almost anything you could imagine, from cash crops (soybeans, wheat, rice, etc.) to cattle or sheep for dairy, forestry (eucalyptus, pine), vineyards, olives, blueberries … None of these is a new crop to Uruguay. If you're buying for investment, plant soybeans (to sell to China). If you're buying for investment and fun, try a hobby crop, like blueberries or grapes.

You could buy 50 acres to thousands of acres. One of the many unique things about farmland investing in this country is that there are brokers with access to available farm investment opportunities across the country. All things considered, farmland in Uruguay is one of the most turnkey, user-friendly property purchases you could make anywhere in the world.

What would you do with your land once you'd bought it? You could either rent it out or hire a farm manager. A farm manager is like a property manager for a rental property. He is the key to your success. In Uruguay, farm management is a sophisticated industry, meaning your options can be turnkey. Leasing out your land rather than hiring a farm manager means a lesser but more reliable return, of about 4% a year. Many people buy and rent out for a year, then, when they're more comfortable with the idea, hire a farm management company for the greater yield.

Farmland in Uruguay can be both an investment and a lifestyle, even a retirement plan. You could buy a small working farm (say 10 to 15 acres) with a small house (say 1,500 square feet) for $300,000 to $400,000. Engage a farm management company to maximize the return from whatever crop you decide to farm while keeping perhaps some small field for your own use.

The two biggest objections to the idea of investing in farmland for cash flow are the hassle of managing a farm and the capital investment required to achieve reasonable economies of scale. The farming concern can be overcome by hiring a management company or renting out the land to an actual farmer, as you can easily do in Uruguay, for example. However, the investment amount necessary to achieve a worthwhile return can be seriously restrictive. To make the math work, you need to be prepared to put up at least $500,000 to $1 million. Otherwise, unless you do much of the work yourself, the costs and administration eat up the yield. If you want to become a farmer, fair enough. However, then you're talking about a job and a business, not a passive cash-flow investment.

Annual Cash Crops for Turnkey Farming Cash Flow

One way to invest in agriculture, short of buying your own million-dollar farm, is through shares of a company. This approach can take different forms.

A group we know in Argentina offers units in an investment company that rents arable land and engages a manager to farm it. The difference between the rent and the cost of the manager equals the profits distributed to the shareholders. This approach is highly leveraged (because the company doesn't own anything), meaning the risks are high relative to the potential return. On the other hand, it's an option that requires a nominal investment amount.

We prefer a different model, one that allows the investor to hold title to the land being farmed and then contract with an in-place farm management company to take care of operations. It's a miniaturized version of buying a million-dollar farm and hiring a farm manager. The farm manager cares for multiple individual properties. Each owner receives the revenue from the production from his or her property. If something goes wrong with the farm management, you still own the land.

Unfortunately, this model doesn't work everywhere because segregating and titling farmland into plot sizes small enough to make the investment affordable for the typical individual investor are restricted or disallowed by local law in many countries (making this a critical detail to confirm before investing, as we discuss in more detail in Part VII). In some markets, where the segregation is possible, it's expensive, meaning that, even if a developer is legally able to title his land in marketable chunks, the cost can be prohibitive.

This is often the case in Europe, where project developers, therefore, sometimes sell a contract allowing the right to the land and its production. The specifics vary, but, essentially, the investor owns the plants, the trees, or the vines and their resulting harvests. Usually it's trees. We know opportunities in Spain and France, for example, that allow you to buy, say, 100 trees. The farm management company takes care of your trees along with those of hundreds or thousands of other investors. They harvest the production, and you get your share of the revenue after farm management costs have been taken off the top.

Owning trees or vines isn't as secure as owning the land they're growing on, making this less a real estate play than a straightforward cash-flow investment, but the level of cash flow can make the increased risk worthwhile.

The cost of farm management depends on the investment strategy but comes in two parts.

In some cases, including when you're investing in trees, plants, or vines, you'll pay an annual crop care fee. Assessing specific direct costs for one plot of land versus another can be difficult, so the farm manager charges a flat fee per unit of land. Because you won't have revenue from a farm investment for several years (you have to wait for the trees to be planted and then to begin producing), many developers include the first X number of years of farm management in the purchase price. After that, the crop-care fee is deducted from the revenue generated.

If you're investing in a plantation growing an annual crop, direct costs are easier to account for. These types of projects typically charge variable annual costs for planting and maintenance, depending on the crop.

In addition, you'll pay the farm manager a fee related to the harvesting and marketing of the crop production. This is usually calculated as a percentage of the revenue from the crop. We like this approach, because it aligns the farm manager's interests with your own. You can figure 15% to 40% for this, depending on the type of produce.

One more related cash flow from agriculture opportunity we like is another step away from titled land. We're speaking of an investment in a hydroponic farm. As the global food crisis worsens, this type of food production, which requires no land, is going to become increasingly popular and common. As an investor, you own the production system. Farm management is handled as it is for a dirt-based farm. The farm manager plants the seeds in your system, maintains the plants, harvests the crop, sells the production, and pays you your share of the proceeds.

No matter the production or ownership method, the small individual investor (like you and us) benefits in every case from the economies of scale. We don't have to support the total investment in roads, water and irrigation systems, electricity, fencing, or any other plantation infrastructure. And we don't have to manage farm workers or get our own hands dirty.

When Cash Flow Grows on Trees

The third type of agricultural investment for generating cash flow overseas is trees grown not for harvest but for timber.

Historically, timber has enjoyed the best risk/reward ratio of any investment sector. Depending on whose chart of historical returns you consult, timber as an asset category has produced an annualized ROI in the range of 12% to 15% per year every year since they started keeping records of investment risk versus return. It's a low-volatility hedge against inflation, an asset class that operates independent of the stock market, and a long-held secret of the world's wealthiest people.

Plus, timber is a commodity that will always have a market and that doesn't have to be harvested at a particular time. If prices for your wood are less than you want or expected them to be at the time you've planned to harvest, you can leave your trees in the ground so they can continue to grow until prices reach a level you like better.

The reluctance historically to investing in teak among small investors has been twofold: first, the investment required, and second, the long timeline to return.

Even a relatively small timber project requires significant capital. One colleague invested in a 100-acre teak plantation in Panama with six friends. The land buy was affordable, but the costs of planting and maintenance were multiples of that initial capital outlay.

Fortunately, in recent years, timber plantation developers have created projects that allow small investors to buy in. Again, in Europe, you'll be buying the trees, not the land. In Panama, some teak plantations offer direct land ownership. Some offer shares of a company. Buy where you own the land or the trees.

Timber holdings are a preferred investment for many pension and college endowment funds, because they like stable, low risk to reward investments and they have the time to wait for the returns.

For our money, teak is about the surest timber investment you can make. It is indigenous to only four countries—Burma, Thailand, Laos, and India. For centuries, the kings of Burma and Thailand considered teak a royal tree. Today, Burma, home to the last remaining natural teak forests, all of which are the property of the government, is the largest global exporter of premium teak. These remaining natural forests are being logged at a rapid rate, meaning the growing world demand (for outdoor furniture, flooring, boats, etc.) will have to be fulfilled by teak plantation production. And, right now, there aren't a lot of teak plantations worldwide.

Although trees take years rather than months to grow to a harvestable size, they also can carry less risk of being completely wiped out than, say, a soy crop. Teak trees have been farmed in plantations for hundreds of years starting with plantations in Southeast Asia. Today, teak plantations can be found in a band around the earth between 20 degrees north and 20 degrees south of the Equator. This includes Southeast Asia, India, Central America, Brazil, and parts of Africa. In addition to the required climate, you also need good soil to get decent growth rates for teak and a definitive dry season of at least four months. The dry season is when the hardwood in the center of the trees is made.

Taking a look at a world map and all things considered (the ideal growing requirements, the ease of investment, the cost of investment, the opportunities for investment, and the tax implications), Panama jumps out as a top choice for investing in teak. This country is one of a handful of places in the world where you can grow premium teak trees. In addition, Panama is very pro-investor, home to a number of managed plantations, and, because it is interested in promoting forestry, makes the proceeds from related investments tax-free.

Owning a couple of hectares of teak trees could be a very profitable concept. At the same time, owning a couple of random hectares of any kind of tree doesn't make much investment sense. For this kind of investment to work, you need trees that are managed professionally by an outfit with both experience growing and harvesting the crop in question and access to a ready market for the end product. Few of us are prepared to invest the time that would be required to understand the industry and actually run the farm. We've known investors who have decided they didn't want to share proceeds with a management company and have chosen simply to plant some teak trees and left them to grow. The results have never been good. Teak trees need experienced care over their lifetimes to produce top-tier timber.

Fire is one key risk of a timber investment. Teak trees, however, are effectively immune from forest fires after about three years of growth. Years ago, we toured a timber plantation. The manager walked us through a section of the plantation where, a few years earlier, a wildfire had swept through. In that area at the time of the fire were four- and five-year-old plantings of cedar, mahogany, and teak. Almost all the cedar and mahogany trees were lost to the fire, but not one teak tree. We saw the teak growing still.

Insects are another risk. As with fire, though, teak is fairly immune after three years.

Perhaps the biggest drawback to investing in trees, teak or otherwise, is the investment term. Unlike cash crops, for example, which can mature in less than a year and be taken to market, you have to wait 10 to 25 years before you see any real return from a timber investment. Eucalyptus matures in maybe 13 years, pine in 15 to 20. It can take as long as 25 years before teak is ready for harvest, making it a good legacy investment, one you make as much for your kids and grandkids as for yourself. Thinnings are done several times during the growth cycle, but they bring limited cash flow. The full harvest is sometime between year 17 and year 25, depending on growth rates, which depend on soil and weather.