When you think of investing, you probably don’t think of trees. Lumber is a commodity that’s used for paper, wood furniture, even burning. Who would invest in something that burns? But, many of the wealthiest people on Earth invest in timber. Here are five things you need to know about this unusual opportunity.
It’s Steady and Reliable
Everyone knows someone who lost money in 2008 in the stock market. The natural volatility in stocks is a double-edged sword. Some people even like the rollercoaster ride. If you don’t, or you just want a way to diversify, timber is a steady investment that is still poised for growth.
Most people who invest in timber like the fact that they can physically see it, visit it, and easily understand how money is made off the land.
It’s not like an investment in stocks or bonds, where you receive a piece of paper and you have to just assume there’s a legitimate company behind it all.
Many people who buy timberland, or timber itself, like to visit it. For landowners, they like visiting their property, hunting, and fishing on it.
Investors who want to buy land directly are in for some sticker shock, however. Many times, land can’t be purchased for less than $5 million and that’s for a few thousand acres on a few different parcels.
Most of the land for sale is in the Southeast, Pacific Northwest, and New England.
Older trees cost more, since they’re closer to harvest, while younger trees are cheaper, but you have to be willing to hold them for longer periods of time.
It’s Easy To Invest In
It’s a straightforward real estate transaction. When you buy timberland, you’re buying land. If you’ve got the money, all you need to do is sign the paperwork and it’s yours. If you’re taking out a mortgage for the property, then of course it gets a little more complicated.
But, even if you don’t want to invest directly, there are ways to get into timber that don’t involve direct ownership. A Real Estate Investment Trust (REIT) is one of the most popular methods. REITs are trusts that invest in real estate. A timber-focused REIT will get you into timber for as much money as you can comfortably afford, whether that’s a few hundred dollars or a few thousand or millions.
The major Timber REITs are Weyerhaeuser, Plum Creek, and Rayonier. iShares Global Timber and Forestry ETF is another easy way to get exposure to the timber market. Like all exchange traded funds, the iShares Global Timber and Forestry ETF tracks the performance of the underlying asset – in this case, timber.
It has the liquidity you’d expect from an ETF too, so selling off your positions isn’t a problem.
Good Land Is Intrinsically Valuable
One of the best reasons to invest in timber is the fact that land is intrinsically valuable. With older trees, the profit comes from the actual harvesting. With younger trees, the income comes from granting licenses to hunters and fishers, and from selling pine needle cover, which is used in landscaping.
You don’t have to do much with timber. You buy it. You hold it. Stuff happens. Whether you end up leasing the land out, or selling the trees directly, the investment will eventually pay off.
And, if you have a reforestation project in place, the income can be generational. In fact, many people buy land with the intent of passing the land down to their children and grandchildren.
It’s a Hedge Against Inflation
Everyone’s looking for a hedge against inflation. And, while many people flock to gold, it’s still an asset that you have to stuff somewhere. If you don’t want to worry about insurance, holding fees, and wild swings in the short-term, buy forest land.
Timber has shown to be an effective hedge against inflation, especially unexpected inflation.
That’s largely due to the fact that land prices tend to move in step with mortgage notes, which are tied to central bank interest rates which influence inflation.
Since land is a hard asset, and it doesn’t move, it’s inherently valuable. No one can make land, and so there’s an inherently limited supply.
And, before you think that this is an investment for institutional investors, roughly 70 percent of the 500 million acres of commercial timberland in the U.S. is owned by private individuals. Mostly, investors own land through real estate investment trusts, timber investment management organizations, The Timber ETF, and direct ownership.