Posts

Should I Invest in Timberland Real Estate?

I’m often asked “Should I invest in timberland?” and “If I invest in timberland, is it better than investing in stocks, bonds, farmland, etc. etc.?” My answer is generally “It depends” because the term ‘better’ is almost always subjective… What is better for one investor may not be for another depending on end goals. Understanding the basics of how to establish and achieve your goals in a timber investment is paramount.

Timing Your Investment Goal

We all want our investments to grow in value and make us wealthier, and timberland is just that… a growing investment (pun intended). It enjoys stable, steady growth, paying no attention to the volatility of today’s political world, and that is one reason why many of the wealthiest people in the world invest in timberland as a method of diversification and asset protection. Annualized returns range from 6-20% in my experience, sometimes more, with many factors weighing in, almost all of them related to the demand of the local timber market equally or greater than the actual land related aspects like site quality and stocking.

But, while well stocked and managed timber stands grow in size and value each year, unless you acquire a sizable portfolio, cash flows may only come every 3-7 years after reaching a merchantable size. So, when deciding to invest in timberland, it’s important to be able to service any debt obligations during those periods between cash flows and before buying, understand when you’d like to receive the bulk of the cash flows that will come during the timber’s “rotation” (financial lifetime of the stand). For example, if you intend for your timber investment to pay for your 3-year old child’s college fund, it may be wise for you to buy a well-stocked tract of pine plantation that’s 1-2 years old. This should enable you to buy more acres at a lower price, and those stands should be reaching a merchantable status as your child approaches 18 years old. That plantation will generally see 3-4 thinnings between the age of 15 and 30, all the while graduating into more and more valuable product classes through the process referee to as “product change,” until you ultimately clearcut and begin the process again.

But, if you’d purchased the wrong age class of timber, you may have missed your income window and had to come out of pocket or borrow money while you waited on the stand to mature. Please note: The merchantable age of a stand is subject to several factors, and the age of clearcutting and when you thin may change based on your objectives. The ages of 15 and 30 are just commonly seen benchmark ages in the southeast for private landowners. Finding the right timberland tract for your goals is key to success as an investor in this type of property.

Define Your Management Strategy

Elaborating further, a critical part of investing in timberland is having a successful management strategy. Are you managing for money, for wildlife, or a balance of both? They don’t have to be mutually exclusive, but you’re also not growing trees for future harvest(s) inside those huge food plots you installed to hunt monster bucks and turkey in. So, before or after you buy a tract of timberland, enlist a true consulting forester that acts as your fiduciary, working purely for your best interests, in order to help you establish the best management plan for you. We have many forestry consultants on our team that work hand in hand with landowners looking to balance timberland investment and recreational use as well as landowners looking for pure economic return. Whatever your objectives, without a sound timber management strategy in place, you will leave a lot of money and time on the table.

Another major driver in timberland returns, and possibly the most important, is competition. Timber and the product classes that it consists of are commodities, and the value of those are greatly affected by supply and demand. As such, you want your timber investment to be located in an area with a high concentration of mills that compete for the product classes your timberland will produce, generally within a 60+/- mile hauling distance of that market area (commonly referred to as your “wood basket”.) If you purchase timberland in an area with only a single or few mills, demand for your timber will likely be low and local supply will be high, so the timber prices paid will generally be dictated and depressed rather than driven up by market competition, which negatively effects your returns in both the short and long term. And, once it’s time, it’s harder to sell timberland in an area with consistently low timber prices.

In the past, I’ve elaborated on the importance of site index, site prep and planting, and the many tax advantages of owning timberland vs. other investments, such as basis depletion, a multitude of deductible capital expenditures, long term capital gains treatment, and conservation easements. But, one of my favorite attributes of timberland is how tangible it is vs non-land investments. Timberland is an investment with roots than run deep, providing an opportunity for you to manage your timberland in a way that allows you to spend time with your friends and family outdoors, teaching them about the blessings bestowed upon as land stewards, and the ability to leave a legacy behind that your loved ones can benefit from for generations to come. That kind of return is beyond measure.

This post is part of the 2019 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here

 About The Author: Clint FlowersALC is a top producer with National Land Realty, a member of the REALTORS Land Institute of Alabama, and a member of the 2018 Future Leaders Committee.  He was a NLR Top Producer Nationwide in 2016 and 2017. He also won the 2017 APEX National Broker of the Year award for Timberland.

 

Five Helpful Tips for Owning and Managing Timberland

I admit, I am a little partial as a registered forester and land broker but I do truly believe timberland ownership can be one of the best and most rewarding investment options.  Below are five helpful tips that can apply to any owner of timberland.

1. Seek Professional Assistance

Timberland is optimized with the assistance of a professional manager.  For many landowners, the best source of professional assistance is a consulting forester. The consulting forester is a trained professional that works on behalf of the landowner making sure the landowner’s objectives are met and their best interests are represented. They can assist with the preparation of forest management plans, timber marketing and sales, reforestation, silvicultural treatments, wildlife management, and hunt lease management to name a few.

This assistance is especially critical at the time of timber sales.  For most landowners, timber sales are not frequent events, the landowner may not have an accurate expectation for the value of their timber in the current market. A consulting forester can inventory and appraise the timber to provide an accurate estimate of the value to be expected and then recommend the best method to market the timber on a competitive basis to make sure the return is maximized. They assist in execution of a harvest agreement or timber deed between the landowner and buyer, written to protect the landowner’s interest.  Finally, they will make regular site inspections during the harvest to make sure the work is occurring as agreed and the land is not damaged.

The service of a professional should more than pay for itself for most owners.

2. Determine your ownership objectives

It is important to know why a landowner has invested in timberland real estate and communicate that clearly to his/her advisers. Ownership objectives vary widely among landowners and most folks land own for a combination of reasons. There are usually one or two primary objectives for owning. Examples may be income from the sale of timber, recreational use like hunting, fishing, or riding ATVs, conservation of wildlife and habitat, family legacy, or investment for future higher and better use. Each of these objectives will require unique management activities to increase the probability the objectives are realized for the owner.

3. Create a forest management plan

It is hard for anyone to hit a target if they do not have something to shoot at.  A forest management plan is a critical document for any owner of forestland. Typically prepared by a professional forester after consultation with the landowner, the plan serves as a guide for the management of the land, typically a 10-year horizon.  Components of the plan may include property description, forest stand type map, forest stand descriptions, and management prescriptions for each timber stand over the planning horizon, a timeline or schedule of activities the landowner should expect, and a log section where the landowner can keep notes on their activities.  Having a plan and following it will increase the chances the owner’s goals are met.

 

4. Manage Risks

The ownership of timberland comes with liability and risk like any investment.  It is important for the owner to understand those risk and mitigate them as best as possible.  Major risk to the loss of timber include fire, wind damage, insect, and disease.  Each of these risks can be reduced using good forest management techniques with professional assistance.

Landowners can have liability exposure from trespassers and recreational users depending on the laws in their state.  It is wise to understand those liability issues and protect against them.  Liability insurance policies are available to protect landowners from accidents that may occur on their property.  It can also reduce liability if property boundaries are clearly marked and posted to deter trespassing.

5. Incentive Programs and Tax Benefits

There are many incentive programs available for the owners of timberland.  Owners should consult with their consulting forester, state forestry representatives, their local extension agent, or their local USDA Natural Resource Conservation Service (NRCS) office to determine what programs are available and how they may be able to benefit.   These funds may offset the cost of reforestation, property improvements, wildlife management practices like prescribe burning, plantings, or other activities.

Most states have reduced property tax programs for owners of timberland.  The programs tax the property based on its current use rather than market value.  In areas where timberland is near urban areas, this can be a substantial annual saving for landowners.

It is also equally wise to have a tax professional and/or an attorney that is well versed in timberland to advise on annual income tax return and estate tax issues.  A great resource for landowners is www.timbertax.org.  This website has information on a wide range of tax topics relevant to forest landowners.

This post is part of the 2019 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here

Chris Miller, ALCAbout the Author: Chris Miller, ALC, is a land broker and consulting forester for American Forest Management, Inc. in Charlotte, North Carolina.

Is Pine Timberland Still a Good Investment? Thoughts on the WSJ Timberland Article

The Wall Street Journal published an article last week that has caught the attention of many landowners or those who are considering making a timberland investment. This week I have been tagged by friends and followers in posts and comments on Facebook to ask my thoughts about it. The article is entitled “Thousands of Southerners Planted Trees for Retirement. It Didn’t Work.”

Ryan Dezember, the author of the article, makes some very insightful observations and reports on broad trends in the Southeastern pine timberland markets. I tend to agree with many of his statements in a broad sense, and am glad to know he has ties to Alabama when he was previously a writer for the Mobile Press Register. You should read his article in full before going any farther in this post. Also from the outset let me disclose that I am not a forester, economist, accountant, or attorney.  Everything below is solely my opinion based on years of observation as a broker of Alabama timberland, and is not legal, forestry, accounting, or other professional advice.

Mr. Dezember makes three points that are virtually indisputable on a large scale across the Southeast.

  • In many places in the Southeast the supply of standing pine timber far exceeds the demand or capacity of the local mills.
  • This “glut of timber” has caused the price for timber to go down in many parts of the Southeast.
  • Some institutional investors and individual landowners have lost money, significant money, in their timberland investments in recent years.

That all sounds like bad news. However, what if someone told you “Go invest your money in the stock market.” That is a broad and daunting task for the novice investor. Are there still any stocks that are winners in a declining market? Sure there are. You just have to know what to look for. The same is true for investing in timberland. Here are some elementary things you can do to increase your chances of making a good pine timberland investment.

  • Find land with quality soils. The better the soils, the better and faster that you will generally be able to grow timber. Look for soils with a high site index for loblolly pines. Soils that will grow genetically superior loblolly to 90′ to 100′ in 25 years are highly desirable.
  • Locate close to several mills. Loggers generally tell me that you cannot haul timber more than 75 miles and the landowner or loggers make any money. Locating land close to one or more mills, along good roads, increases your potential to make a good investment. The closer you are to the mill, the less money the loggers spend on hauling, and the more money goes into the landowners pocket. The money paid to the landowner for their cut timber is called“stumpage”. Locating close to more than one mill means that you have several mills competing for your wood, and you are likely to be able to get a higher price when it is time to sell your land
  • Find sites that can be logged in wet weather. Locating an upland property that can be logged during the winter months is a great way to increase your chances of making a good timber investment. Timber harvesting equipment is heavy and will bog down in the mud during the wet season. Having well-drained soils that can be navigated during rainy weather is a real plus. Mills tend to pay the most during the wet season because that is when they have the most difficult time getting wood to their yards. Look for tracts that are loggable (suitable for logging) during winter and have access to good dirt roads or paved roads.
  • Invest for the Long Haul. Pine trees have been genetically enhanced to grow to maturity faster than ever before. You can now reach a full growing cycle in 25-30 years. But trees still take a long time to reach maturity compared to a stock or mutual fund. Allowing yourself some flexibility on the length of the investment can pay big dividends if you can time the harvest of your timber sale to correspond with higher market prices. Some institutional investors have a fixed window of time in which they must generate a given rate of return. If your fund length is 10-12 years, but your timber needs 15 years to reach maturity, then your fund is likely to suffer. Give yourself plenty of time to take full advantage of the biological growth of the trees and the corresponding higher prices in the timber markets. Giving a tree another year or two of growth may allow the tree to move up into another age class, meaning it can be sold at a higher price because it can be used for a product that requires a larger tree.

The good news for small to medium-sized investors is that you can avoid some of the problems that have plagued institutional buyers. Timberland Investment Management Organizations (TIMO’s) are given the difficult task of going and Finding a large package of timberland to Purchase on behalf of their client, Manage the fund for 10-15 years, and then Sell with guaranteed returns. Often these packages are 10,000 acres up to 100,000 acres. It is difficult to pick the very best pieces of land when you take that approach. To some degree you have to take what is available on the market at the time. Smaller landowners can be much more surgical in their selection of prime pine timberland.

In my opinion, pine timberland can still be a good investment. Like every other investment, you need to educate yourself on the topic, research the options, and enlist the help of a team to help with your purchase. Southeastern Land Group has a Timber Sales Division with registered foresters that can assist you in making a sound timberland investment. Our team of brokers and agents helps people buy and sell thousands of acres of timberland around the Southeast every year. We will be happy to assist you in your search for a good timberland investment. Please let us know how we can be helpful to you with your land investment needs.

This article was originally posted on the Southeastern Land Group website.

Jonathan Goode is an Accredited Land Consultant (ALC) and a partner with Southeastern Land Group. He is a licensed broker in Alabama and Mississippi, and is the co-host of the weekly radio program and podcast “The Land Show.”

Timberland is Timberland… Right?

The majority of our market in the Southeastern United States consists primarily of timberland. One of the biggest problems I encounter with both Buyers and Sellers of timberland is that they don’t understand the value components of timberland tracts and what questions to ask to determine them on a tract by tract basis. A bigger problem is that many times, neither does their agent. Understanding what to look for in timberland enables you to be a smarter seller, buyer, or agent.

What makes a good timberland tract? A combination of important factors come into play with timberland: soils, site preparation, stocking/ stand density, and as always with real estate: location.

Soil

In regards to soils, you want to ensure that the soils are capable of growing the species that perform best on that site and grow at a rate competitive with other species/products in your timber market. And while you can take actions to enhance your soil’s growth rate like fertilizing or mechanical site prep applications like bedding, the better your soils are to start with, the faster you’ll see results from your timberland. Learn what site index rating the property has for the species you intend to grow or the species it’s already stocked with. The site index correlates closely with the yield of your forest. It acts like a score; that score is the height of that species at a certain age. The higher, the better. A site index score of 70 for loblolly pine in a plantation setting, the most common species see in timberland in our market, indicates that under normal conditions, a dominant and codominant loblolly pine would be 70 feet tall at 25 years old. Always remember that Site Index is species and age-specific and can vary greatly by both, so before using a tract’s site index rating to make a financial decision, be sure to confirm what base age is being used.

Site Preparation

Regarding site preparation, an analogy I use frequency is a vegetable garden. Which grows best – A garden that was tilled and sprayed or removed competing weeds, etc. or one that was planted directly into the soil without any site preparation? The prepared site of course. Timberland is no different, especially in a plantation setting. Reducing the initial competition through chemical and/or mechanical site preparation applications can greatly affect the long-term yield of timberland.

Stocking/Stand Density

When it comes to stocking and density, understanding your goals is key. Some saplings, speaking primarily of pine here, are genetically designed to grow fast but not necessarily clean, meaning more limbs and wider growth rings, both of which can affect the stand’s ability to grow lumber grade logs and poles (in pine stands). These stands will be more prone to produce products that are pulp and chip-based throughout their financial lifetime, also known as a “rotation.” Regardless of the source/type of seedlings you have, stand density can also affect the quality of your timberland. Wider spacing equals fewer trees. That helps them grow in diameter faster, but may limit vertical growth and the natural pruning that occurs in a properly stocked stand. Beyond that, a more simplified explanation can be fewer trees potentially equals fewer harvests and less money over the lifetime of the stand.

Assuming all things being equal between two tracts of timberland, location can be the most important factor in determining which is more valuable. Logging and hauling costs are the first expense that comes out of the gross income generated by a timber sale. The closer your proximity to mills that process the products your timberland will produce, the less it will cost to harvest that timber and the more competition you’ll see for that wood, both of which yield a higher net income to the landowner. The net income from a timber sale is also known as “stumpage”. Stumpage is the rate most experts are quoting when asked about current timber prices. Location can also determine what types of weather you can perform harvests in, which affects when you can bring your timber to market. Tracts with logging limitations due to weather concerns, such as wet natured or floodplain tracts, can be restricted to selling during the dry season vs tract with dryer ground or abundant road frontage that can be logged year round. Being able to sell your timber in a wet weather market can allow you to take advantage of huge swings in timber prices because when supply is limited, demand rises, and prices along with it. I’ve witnessed timber prices go as high as four times the norm due to wet weather logging demand.

I’m often asked how “the timber market” is doing or “isn’t timber down right now?” It’s important to remember that timber is a commodity and there is no single “timber market”. Every species can produce several product classes, each has their own market with contributing or limiting factors, and the current value of each product class is driven by supply and demand. One market may be down while another is up. Arming yourself with a true expert in timberland is imperative to ensuring your maximum yield is reached as a buyer or seller of timberland.

This post is part of the 2018 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here.

Clint Flowers, ALC is a top producer with National Land Realty, a member of the REALTORS Land Institute of Alabama, and a member of the 2018 Future Leaders Committee.  He was a NLR Top Producer Nationwide in 2016 and 2017. He also won the 2017 APEX National Broker of the Year award for Timberland.

Make More Money Off Of Your Timberland

Timber prices are at a record high. The tragic wildfires of last summer and trade disputes as well as an increase in demand for new residential housing have all caused the price of timber to skyrocket. With low supply and high demand, timberland owners are sitting on a potential gold mine. To make the most off of the high prices, you’ll need to tread carefully. Here’s how to make the most out of the booming market.

Check The Timber Mills

Is your local log mill looking for a particular kind of log? Many mills are willing to pay extra for logs that meet their specific standards and may dock your pay if they do not. Some mills even pay less for logs that are larger than usual. This means you are getting less money for more timber! Scope out the pricing of your local mills to find out where your tress will make the most money.

Long-Term Gain

Patience is the name of the game when it comes to timberland. Prepare to lose money for the first few years because you will need to spend money planting and taking care of the trees. Since timber doesn’t provide immediate returns, many people might be hesitant to invest.

However, timber has historically produced strong long-term returns. Many financial websites, such as CNN Money and Investopedia, recommend investing in timber as a way to diversify your portfolio. The returns tend to move countercyclically to other markets, providing your portfolio with a safety net. Not only is investing in timber a smart financial move, it is a good investment in your land. Timber is a hearty, relatively low maintenance tree that will produce steady returns for years.

To Cut Or Not To Cut?

When you cut your trees doesn’t only impact your current crop, it will also determine the growth and health of the next generation of trees. With prices at a record high, it can be tempting to cut down your trees as soon as they mature. Try to plan harvests around times that would benefit the saplings as well as when your timber is at its highest value.

Best Practices

Taking care of your timber now will result in high-value trees down the road. Regular thinnings, regeneration harvests, and timber stand improvements (the culling of undesirable trees and saplings) are all practices that result in healthier (a.k.a. more valuable) trees. Healthy trees mean healthy saplings and a whole new generation of high-value trees. It’s a never-ending cycle of profit!

Sky-high prices and an increasing demand have created a modern day gold rush. Although it can be tempting to chop down all your trees and cash in on the craze, long-term planning is the best option for you to make the most money off of your timber.
To learn more about timber, be sure to check out the newly updated LANDU course Timberland Real Estate on August 1st being hosted by the RLI Alabama Chapter.

This article was originally posted to the National Land Realty blog.

About the Author: Laura Barker is the Membership and Communications Specialist for the REALTORS® Land Institute. She graduated from Clark University in May 2017 and has been with RLI since October 2017.