Timberland is a popular investment with many Americans. But unlike other asset classes, with timberland you can visit your investment to spend an agreeable weekend camping, hiking, hunting, picking wild berries, or simply sleeping under the stars.
Even if you are a homebody and the great outdoors are not for you, you can still be swayed by the proven track record of steady returns that this asset class has to offer.
Investing in unimproved, rural timberland is much easier than many people may think. It is also much more lucrative than many might imagine.
Two Value Components
Timberland investors need to keep in mind that there are two things that make up the value of timberland: the bare land, and the timber growing on top of it.
The Bare Land
We all know that land has finite supply. Unlike money, it cannot be printed infinitely. Land cannot be moved either. It is — literally — not going anywhere. Land is also hard to destroy or alter. Because of all these reasons land was, is, and will always be a low risk investment that compares favorably to government backed bonds and securities.
Historically, bare land values for timberland have appreciated at average annual rates of around 5 percent. For that reason they have always served as a very good hedge against inflation. Even with professional management, the annual carrying costs are low, and often can be completely offset.
The Growing Timber
The value of the timber will fluctuate more than the value of the land, but timber can still generate double digit returns. What makes the potential returns from timberlands so high? Unlike most agricultural products, timber does not have to be harvested at the end of a growing season. When timber markets change price — typically due to local, regional and global economics, weather, and seasonal variation — a landowner can simply make the choice to wait until markets are more favorable to a harvest. As a landowner waits, the timber continues to grow.
As the trees get older and bigger, they turn into more valuable products. So when the decision to harvest is finally made, not only does the landowner now have more tons of volume to sell, but the average value of each ton has increased as well, even if the market has remained flat. Timberland economics are indeed a thing of beauty.
So the key to maximizing the power of a timberland investment is to recognize that timber markets are cyclical in nature. The ideal investor should have the flexibility to take advantage of favorable markets as they happen and ride out poor markets until they strengthen.
It’s important to note that all of the above pertains to the ownership of land; not to holding shares in a real estate investment trust (REIT) or buying timber investment management organization (TIMO) services. These investments are often subject to varying levels of overhead, management costs, debt service and dividends, most include non-timberland assets, and many have predetermined liquidation dates. In short, the REITs and TIMOs will take away from investors the single most powerful tool a timberland owner has: flexibility.
Even investors who would prefer to not get muddy driving an ATV over their land will love timberland for the financial returns it has to offer. Bare land offers a premium hedge against inflation and investors control when they bring the timber to market; when the price is right.
Article Courtesy of Newsmax.com
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