Investors tend to center their capital on traditional investment types: Stocks, bonds, residential real estate and, occasionally, commercial or industrial real estate. Acquiring a good mixture of these investment classes helps develop a diverse, hedged portfolio. But beyond that, the most successful investors understand a little creativity is one of their most vital assets.
Identifying and acquiring unconventional investment assets can help savvy investors diversify their portfolios in even more meaningful ways. One often overlooked, yet increasingly valuable type of investment asset, is forestry—areas used to generate timber.
Why take a look at timber?
Timberland is an exceptionally stable and lucrative type of investment. In fact, many large pensions and trust funds in Canada already used timberland as an investment vehicle. That’s because while it may not offer the highest possible rate of return, it’s a long-term investment that provides investors with a stable, reliable income source.
National and international market factors are leading to increasing demand for timber across North America. Timberland investments are now more lucrative than ever before. But before putting money into forestry, it’s important to understand the market factors impacting timberland investments and the basics of investing in timberland. Then you can decide if timberland is the right investment for your portfolio.
Profiting from timberland
When investing in timber, an investor purchases forestry lands used for timber production. Therefore, it’s actually a type of real estate investment! It’s how the land is used that dictates how the investment will generate income:
· Biological growth: When trees grow, they increase in weight and volume. This means your timberland investment is continually growing in value, as it simultaneously grows in weight and volume. As biological growth elevates the value of your timberland, companies will begin harvesting the timber itself to realize that value.
· Land appreciation: Like all real estate, forestry lands appreciate with time. The land is likely to improve in valuation as you grow your timber products and harvest them. If the land is near a populated area, it’s likely to appreciate much more rapidly. There’s a chance it could be converted to a golf course, shopping center or residential development following timber harvest—or even re-planted!
· Value growth: Over time, as trees mature, they’re used for more valuable types of timber products. As your timber continues to grow and change, it’s per-volume value will increase, as well as its volume. The timber appreciates exponentially with time – both in volume and in value.
· Price changes: When the real estate market is active, the price of timber will rise significantly. Most single-family homes are built with timber, and smaller multi-family properties also tend to rely extensively on timber products. Many developers and architects have also begun incorporating structural timber into large skyscraper-style developments, because of its sustainability and renewability.
While timberland often represents stable, reliable income, there are risks associated with purchasing forestry lands. For instance, timberlands are susceptible to wildfires and other natural disasters that diminish value. Additionally, there’s a significant risk your trees could become infected with a disease, killing off years of growth and rendering it impossible to harvest.
Additionally, trade tensions and economic conditions could make your timber products less valuable. Recent trade tensions between the U.S. and Canada, for instance, raised tariffs on Canadian timber products entering the United States. This reduced demand for Canadian timber both at home and in the United States, lowering the prices of timber products.
Direct investments in timberland
The most direct and lucrative route to invest in timberland is to purchase a forestry area outright. You can buy a piece of forestry land usually for less money than you could buy a developed asset of a similar size.
There are benefits associated with purchasing timberland directly. The most significant is once you’re done harvesting timber from the site, you could either opt to plant new trees, develop the asset or sell it off. Buying an asset in a populated area presents you with lucrative options to potentially pursue in the future.
Because timberland isn’t developed real estate, you likely won’t be able to secure traditional lending products to acquire it. This means you may need to have enough cash on-hand to purchase without a loan. This obviously presents a much higher barrier to entry compared with most residential and even some commercial developments.
If you own timberland outright, you’ll also need to hire a timberland management organization (TMO). The TMO will essentially farm the trees on your forestry land. The TMO may also help you harvest the trees, and process them into timber products ready to sell.
Peripheral timberland investing
If you don’t have the capital necessary to purchase timberland outright, or if you want to make a smaller investment in forestry land, you could put your money into a real estate investment trust (REIT) or exchange-traded fund (ETF) specializing in timberlands.
When purchasing timberland through an REIT or ETF, you’re buying a share in timberland owned and managed by the trust fund. There are ETFs and REITs focused exclusively on timber; others may feature a more diverse portfolio of natural resources, including timber.
While due diligence is necessary during the investment process, purchasing a stake in an ETF or REIT essentially allows you to sit back and collect dividends. Almost no effort is necessary to manage or maintain your timberland investment when you buy into an REIT or ETF.
Money really does grow on trees!
Regardless of how you chose to invest in forestry lands, making an investment in timberland could help you move toward financial independence and generate passive income with very little effort. Buying forestry lands outright or purchasing a stake in an REIT or ETF allows you to take advantage of the investment opportunity presented by a sustainable, renewable natural resource.
They key takeaway when investing in forestry is to pay close attention to macroeconomic trends and understand the life cycle of timberland. Understand that the trees on the land are just as valuable as the land itself—if not more so! Forestry can be a great investment, but it takes a long time horizon to realize returns.