“Money still grows on trees” as a past article (“For Some, Sound of Profit Is Timber”) in the Wall Street Journal has mentioned. As a long-term investment, timberland has outperformed the Standard & Poor’s 500 stock index. Pension funds, insurance companies and investment trusts among others, have increased their holdings in timberland dramatically over the last 25-30 years because of this realization.
There are several factors that play a roll in making timberland an attractive asset:
- “Under all is the land” meaning that the land is a separate asset apart from the timber. The “highest and best use” may change over time and has a separate value from the timber; however, the type and amount of timber can have some influence on the land value.
- Timber is a crop, even though it has a longer rotation than corn or soybeans. If it is managed properly, it has a good rate of return with a periodic income stream from thinnings and a final harvest.
- Unlike corn or soybeans this crop does not have to be harvested at a set time. To maximize return, it should be thinned and harvested within a certain window of time, but that window is fairly broad. Thinnings could have a two to three year window with the final harvest having an even broader window. This allows you to pick the best markets for your timber sales. We have seen this increase the final return by as much as 25% in some cases. Timing is everything.
- The return from the sale of timber and land is a taxable event, but in most cases is as a capital gain rather than ordinary income. Unlike stock which pays dividends and is taxed as ordinary income, land and timber “dividends” are their growth and you do not draw those “dividends” until you sell either the land, timber, or both. Here again you can pick the time that is most beneficial to you to have that taxable event.
- Timberland is a fairly stable asset. It does not have the wild “ups and downs” of the stock market. This is why pension funds and insurance companies like timberland investments. Timberland is much like high grade bonds as a long-term investment over ten years or more. It has a good up-side potential if you catch the markets right.
- Over the long haul, the return can be quite attractive because it keeps producing. In many cases a single property has funded college educations and more for both children and grandchildren.
- It helps the environment. A vigorous growing stand of timber removes carbon dioxide from the air and produces oxygen. Also, with newer technology, the biomass from forests could soon be used on a wider scale as an alternate, cleaner source of energy.
- In these uncertain economic times, a timberland investment is a great hedge against inflation. Historically, timber values have increased at a greater rate than the rate of inflation.
- Timberland prices are now in a range that makes this type of investment much more attractive.
A timberland investment is not something that you can go away and forget about. The key to a good return is first – it must be the right property at the right price and second – it must be managed properly. If mistakes are made in either of these areas, returns may be minimal. The selection of the right property and proper timber management are critical. The Brokers and Foresters at Grant Massie Land Company can assist and advise you in this all important asset selection. We have over 30 years of experience working with timberland tracts and advising clients, whether they are buying or selling. Give us a call.