Owning forested land for investment reasons has been practiced since wood was deemed a valuable commodity by humans. And timberland has experienced massive growth in value, especially since 1974 when the Employee Retirement Income Security Act (ERISA) was passed. Timberland investment is a great way to diversify your portfolio as an investor, and this guide will help you make smart decisions when making land purchases.
Let’s begin with some important information that you need when you want to invest in timberland.
What to Consider Before Buying Land for Timber
Several factors determine whether a parcel of land will be a good timberland tract. You should consider getting the assistance of a forester or real estate agent, especially if you’re just starting out in timberland property. That said, here are some of the essential questions you should ask about a property when buying land for a timber investment:
- Can the property deliver a decent rate of return (ROR) on the investment price?
- Is the property located near any mills that purchase the type of wood grown on this land?
- Is the soil productive enough to grow quality species of timber?
- Can you successfully log most of the property?
If you can answer all these questions in the affirmative, then you can purchase the property. Now that you know the major points to look out for when purchasing land, let’s look at how to buy timberland.
The Process of Buying Timberland
One way of investing in timberland is by hiring a Timber Investment Management Organization (TIMO) to buy and manage the property on your behalf. This is the method employed by most charitable organizations, pension funds, and endowments with large investment capital and little expertise (or desire) to manage their timberland assets.
There are two types of products you can get from a TIMO. The first is an individual account that gives you more control over the investment but requires relatively high capital to make land purchases. The second product is called a commingled fund, which allows you to pool your resources together with other investors to purchase the property. Commingled funds enable you to invest at a relatively cheaper rate, but you will have lesser control of the investment capital.
You can also purchase the asset yourself and manage it on your own or hire a personal forester. Individual investors are free to buy as much landed property as they desire, but should buy at least ten acres of timberland in order to sell timber at a profitable price.
Now you know how to invest in timberland, so let’s close this article with the perks attached to investing in this asset class.
5 Things That a Timberland Investment Can Do For You
There are many benefits of owning timberland properties. Here are a few:
- Timberland provides almost equal returns as stocks, yet it is less volatile – it is a low-risk investment with relatively high profits.
- Timberland provides excellent portfolio diversification since its returns don’t correlate with other asset classes, thereby lowering the overall volatility and risk of your portfolio.
- Historical data shows that timberland investing can serve as a powerful hedge against inflation.
- Regardless of the ongoing situation in an economy, trees directly or indirectly continue to increase in value. This is because trees always grow in volume, unlike other traditional assets such as gold. Even if the price of wood falls, you can always leave your trees to grow until another time when prices become favorable.
- Timberland properties can give you an avenue for relaxation even while it is serving as a money maker. How many asset classes can you go horseback riding or hunting in? Owning your own timberland property can give you the opportunity for enjoyment such as these activities and more.
Timberland has been a good investment for a very long time and continues to be a valuable commodity. It’s a great way to expand your investment portfolio and do something environmentally friendly at the same time.