Why Invest in Timberland?

“Money still grows on trees” as a recent article in the Wall Street Journal mentioned (“For Some, Sound of Profit Is Timber”). As a long term investment, timberland has out-preformed 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 role in making timberland an attractive asset.

1. “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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. It helps the environment. A vigorous growing stand of timber removes carbon 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.

A timberland investment is not something that you can go away and forget about. The key to a good return is (1) it must be the right property at the right price and (2) it must be managed properly. If mistakes are made in either of these areas, returns may be reduced. 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.