Investors have long been attracted to timberland as an alternative investment. Once you own the land, the trees just grow biologically; there is no rent to collect and relative to many other forms of real estate (including farm land), it is relatively low management.
Timberland tends to have a low correlation with the stock market and even other forms of real estate. Additionally, if you own timberland directly, you have the benefits of owning land that you can touch and see, hunt and fish on, build your second home on, and enjoy in other ways.
The Basic Economics of Owning Timberland
Putting aside land appreciation or the potential that your timberland will one day become a master planned subdivision or shopping mall, timberland’s main source of income is the sale of mature trees to be milled and then sold for construction and other uses. It usually takes around 20 to 30 years for trees to fully mature.
Depending on the type of trees and the market when the timber is sold, you could earn $500 to $2000 per acre (at $1500, you would be looking at $60 per year in income if you were to annualize it over 25 years).
Beyond that, you might be able to make $5 to $20 per year for hunting or grazing leases, $2 or $3 a year in other non-timber products like maple syrup, pinestraw, and mushrooms, sale of smaller timber for biomass, pulp of $10 to $20 per year when annualized (it is typically only thinned out and removed every 10 or 15 years), and possibly a few dollars more from government conservation programs like carbon credits, wetlands mitigation, and offsets.
Of course land is not expense-free; there is often some management involved and there will be some property taxes. Putting appreciation and side benefits aside, it is not uncommon to see yields on timberland in the 5-6% range.
So, land that nets $85 per acre per year, might sell for something like $1400 per acre.
Potential Downside of Owning and Managing Land Yourself
One of the biggest issues is that you get most of the income from the biological growth of trees all at once; when they are mature and cut down. You don’t get rent checks every month, you get a large check at the end of year 25 or 30.
This makes for a pretty large liquidity issue. Although you are making money because the trees are growing larger and thicker, you don’t see that money until you cut the trees down.
Besides having to manage the land or hire someone to do it for you, the other big issue for people that directly want to invest in land is mother nature: forest fires, windstorms, insects, and disease.
While these are major problems, getting hit by one won’t necessarily wipe out your income source altogether. A fire may not consume all trees and there will still be value in the land. Some of the internal tissue may survive a fire. Disease may kill trees, but the growth that is already there likely will still have value. The soil won’t necessarily be affected.
Because of these issues, most people don’t get involved in directly owning timberland. They usually by stock in timber REITs like Weyerhauser (NYSE: WY) or Rayonier (NYSE: RYN), or an ETF like iShares Global Timber & Forestry ETF (NASDAQ: WOOD) or Guggenheim Timber ETF (NYSEArca: CUT).
Some invest through a Timber Investment Management Organization (TIMO). Many direct timber investors do it because they want to build a cabin for their family on the land, enjoy the land, or need a “safe” place to park a lot of money. The income is secondary.