This is part 5 of a 5 part series on Timber.
In part 1, we looked at some of the factors that affect timber value, and in part 2 we reviewed how foresters assess timber on a property. The 3rd part looked at Timber Management Plans and Present Use Value. Part 4 continued the tax advantage discussion by looking at Tax Basis.
In part 5, we wrap this all up with a discussion of timber as an investment.
GROW MONEY ON TREES!
Timber investments are typically long-term investments and can be a good way to diversify a portfolio. There are also several benefits that a timber investment has over traditional stocks and bonds.
Perhaps the best advantage of owning a timberland investment is that you can enjoy it. Go for a hike, take family and friends camping, enjoy wildlife, hunt, or fish in your own private forest. The parcel could be a buffer around your home or a remote getaway.
2. PERFORMANCE AND WEALTH PRESERVATION
Timber prices and demand for forest products continue to increase. This article shows one example in Western NC where hardwood timber exports to China have increased 30 times over since 2000 from $5.7M to over $150M. As housing starts an increase, foreign demand increases, and climate change negatively impacts supply, timber prices and demand will likely continue to rise.
Appreciation of the land also plays into the ability to grow the investment. With growing populations and a limited amount of available land, it’s forecast that the price of usable land will continue to increase. In some cases, parcels will exist in the path of an expanding town and that timberland may become a subdivision 20-30 years from now, increasing the highest and best use and the value of the land.
Historically, timberland has been seen as a hedge against inflation and is less volatile than stocks which allows it to be a way to preserve existing wealth.
3. BIOLOGICAL GROWTH
While you’re holding the land in your portfolio and enjoying spending time on the land, the trees are growing every day. And as they grow in volume, they also increase in class from lower-priced pulpwood to higher priced sawtimber.
You also have flexibility on when to harvest. If market prices are low, you may want to wait a few years, allow the timber to continue growing and then harvest when the markets are back up.
4. OTHER STREAMS OF INCOME
There may also be opportunities to generate other income on the property from: hunting leases, foraging, education, camping or use fees, the sale of conservation easements, stream or wetland mitigation banking.
5. INCREASE THE VALUE OF THE LAND
By making improvements, you can also increase the value of the land. Adding a small pond, maintaining trails for access, improving roads, creating small clearings to improve views or plant food plots for wildlife areas all improvements that make the property more attractive and easier to sell someday.
6. TAX ADVANTAGES
We previously looked at NC’s Present Use Value Program to defer annual property taxes and we looked at using Tax Basis to reduce income taxes when it’s time to harvest. Additionally, 1031 exchanges may allow for tax deferment when exchanging the land for another investment.
Of course, owning timberland also has risks. It’s a non-liquid asset and will take time to sell. Markets may decrease and timber prices could drop. And there are environmental risks of climate change, fires, insects, disease, and theft.
Timber can be a great addition to any investor’s portfolio, but it does require research and the understanding that it is normally a long-term investment. There are ways to make the most of the investment through time, improvements, and other sources of income from the land while you enjoy the greatest benefit of enjoying use of the land.
This 5 part series on Timber is just scratching the surface of this complex topic. When acquiring timber as an investment, it is essential to consult with an accountant, attorney, forester and many other professionals to ensure that you have a plan in place to leverage tax advantages of ownership.
I help my clients understand land and provide them with education and knowledge to make informed decisions. If you’re looking for a professional land broker or need help understanding land issues like this, let me know! Pat Snyder, email@example.com, www.nationalland.com.
Disclaimer: This is not intended to be tax or investment advice by the author or National Land Realty. No returns are guaranteed. You should consult your accountant and/or investment advisor before making any decisions regarding taxes or investments.