Is Buying Land For Timber a Good Investment?

The national debt doubles with every election cycle and has reached a point of being out of control. Printing more cash and handing out trillions of dollars is a band aide approach that is politically expedient but bad for the value of the dollar and the overall economy. The stock market continues to climb and uncertainty and volatility make it a less and less attractive investment.

When the stock market is at a peak, it is time to diversify into hard assets. One investment alternative is land with growing timber on it.

Is buying land for timber a good investment?  Yes.  It is hard to loose money owning timberland.  Historically, timberland investments are great long term vehicles for growth. 

Who are some of the biggest owners of timberland and large tracts of land? Insurance companies. They are by nature, in it for the long haul and expert in protection of base assets and sure and steady growth.

In this blog post we will go over some of the reasons buying land for timber is a good investment.

Reasons To Invest in Land For Timber

The main reason timberland is a good investment is that the timber asset increases in value through natural growth as well as price increases. Right now, standing timber prices are low due to the trade war with China and shifting demands in building products worldwide.

Land can generate other income and is a physical hard asset that is in limited supply and can never be worth nothing. Stock market equities often end up losing all of their value eventually as corporations come and go.

Timberland REITs (real estate investment trusts) outperformed the S&P 500 in 2019 with one, the Catchmark Timber Trust gaining and astounding 61.5%. Most of the time, the gains of timberland REITs and TIMOs (timber investment management organizations) keep pace with the stock market yet match the low volatility of  10 year treasury bonds. Good gains with low volatility.

Price Appreciation For Timber and Land

Overall, land has gone up in price at a steady rate with a couple of dips during the Great Depression and the other economic slumps. However, strategically located land, such as in the shale play areas of Pennsylvania, Ohio and West Virginia has exploded in value.

Timber prices are in a slump now but quality wood is always in demand as is paper wood.

Opportunity to Earn Lease Income

A lot of folks are afraid of real estate taxes eating into their income from land. Land can be leased to hunting and recreational groups to pay the taxes or even produce a profit.

Portfolio Diversification

Now (2020) is a great time to diversify your portfolio. Actually, last year would have been better as the stock market climbed to all time highs.

What goes up must come down. When the stock market peaks, it is time to bleed some money into hard assets.

And, now with more borrowing and printing of dollars to had out for relief, inflation is sure to follow. Land prices keep pace with inflation and protect what you have.

Hedge Against Inflation

Over time, timberland prices have increased an average of 5% with a relatively flat real price (dollars adjusted for inflation.) In other words, it is a great hedge against inflation. As the dollar lowers in value, and inflation goes up, so goes the price of land.

Timberland is a Physical Asset With a Limited Supply

Land is a physical asset. There are nearly 90 million acres of privately held timberland in the U.S.

However, you cannot make any more of it. To get a sense of how small the Earth really is and how small a percentage of it can grow food and fiber, just play around on Google Earth.

The arable land is very limited and the need for the resources it provides is constantly increasing. More people need more forest products.

Timberland Tax Advantages

The tax advantages of timberland investments are tremendous. When you sell timber, you can recapture your depletion units of the timber sold, reducing the amount of gain from your timber sale, and that gain is taxed at a favorable capital gains rate that varies according to your income.

You can also take advantage of 1031 exchanges where you can reinvest gains from a sale of land into another land deal and defer the tax on that gain.

How Much Money Can Realistically Be Made By Investing in Timberland?

We make money in timberland in two ways:  one is the increase in the land value and the other is in the natural growth of the asset on that land.

Land prices overall have seen an annual increase of 5-7%. Timber, if managed correctly, will grow at a rate of at least 3%, depending on climate and site quality.  I just sold a stand of white and black oak that had beautiful large, quality trees that were only 80 years old.

Real Timber Price Increases

Timber prices have taken a downturn since their peak in the nineties. After the 2008 crash and collapse of the housing bubble, along with lower demand overseas of American hardwoods, timber prices have normalized somewhat.

The current trade war with China has hurt the export market as China, having gone through all of their standing timber relies on the U.S. for quality hardwoods. This too will normalize and shore up standing timber prices. Now is a great time to buy while prices of hardwood timber are low.

Trees grow in value in two ways. They increase in size, thus increasing the quantity of timber and they increase in value as the timber grows into a higher valued size class. For example, an acre of small hardwoods has 25 tons of pulpwood on it worth about $100.

With careful management, those hardwoods grow into sawtimber sized trees. A acre of quality oak might yield 3,000 board feet of timber worth $1,000. The bigger the diameter of the trees, the more incremental growth per year.

Picture a circle that grows an inch each year. As the circle gets bigger, that same inches creates more and more area or volume. So, saw-timber has an exponential growth curve. The best time to invest in a tract of timber is when it is about to start its’ exponential growth into the saw-timber size classes.

Buying an oak tree at 12 inches diameter, after it has already grown for 50 years is a good investment.  The next 50 years is when it will really put on the value in both volume and quality.

The larger a tree is, the more clear, high-quality wood it lays down each year.

Investing in Timberland For Retirement

There are different ways of investing in timberland. One way offers high liquidity, does not require a large amount of money and does not require active management of the forest is to purchase shares of timber related publicly traded stock.

These are REITs and ETFs or Exchanged traded funds. REITs are shares on one timberland management company and ETFs are like a mutual fund for timberland companies.

Better returns can be had by purchasing timberland outright, although this takes a large sum of money. With a smart purchase and good management, this investment can pay off very well and is a great place to put your retirement fund.

With a good real Realtor and Forester, like Stephen A Chilcote, you can get great advice on making a smart purchase.

Conclusion

In this blog post, we covered the basics of timberland investing. It is up to the individual investor to decide which form of timberland investment best meets their goals.

The current recession  has created a great opportunity for investing in timberland. The upside to investing in timberland is that housing will increase and exports will rebound.

Demand drives the price of timber, so as demand goes up worldwide, our quality saw-timber here in the U.S. will increase in value. An investment in timberland could yield excellent returns.