Investing in forest land suitable for timber production can provide you with income, diversification, inflation protection and more. Investing in timber requires careful study of the industry, market, and individual parcels, and is usually a long-term game, with years needed to turn a profit. Timberland is also very illiquid, so you may need a year or more to turn your asset into cash if you need it. Speak to a financial advisor to learn how investing in timber and other real estate assets can help you achieve your long-term goals.
Fundamentals of wood investing
Investing in timber involves owning land that is used to grow trees that can be made into lumber. Wood, considered a real asset, is vital for the production of paper, electricity poles and furniture, as well as for the construction of houses and other buildings.
Timber sales are infrequent, as it sometimes takes decades for trees to grow to a size suitable for harvesting. In fact, you can only make a handful of timber sales in your lifetime as a timber investor. Timber investors can generate income more regularly by selling seeds or renting land to graze livestock. Timberland can also be used for recreation.
More than 500 million acres of commercial forest land exist in the United States, according to the United States Department of Agriculture. An acre of woodland can cost anywhere from $1,500 to $2,000, with prices varying depending on location, road access, and type and maturity of trees. The value of wood also varies according to the variety, size and quality of the trees. According to TimberUpdate.com, which tracks prices and trends in the lumber industry, prices can range from around $5 a ton for small, low-quality trees to nearly $50 a ton for mature, straight trees. which can be sawn into knots. loose boards for decorative use.
Advantages and disadvantages of investing in wood
Timberland has a number of features that make it attractive to investors. These include:
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Income from the sale of timber to sawmills
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Inflation protection similar to other commodities
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Diversification and risk management of owning an asset uncorrelated to stocks, bonds and other asset classes
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Favorable capital gains tax treatment for most income
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Appreciation as trees become more mature specimens that command higher prices
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Sustainability, since trees generally benefit the environment
Owning forest land can also give you the opportunity to personally benefit from an investment. A section of wooded land can even provide a site for building a second home or even a primary residence.
But owning forest land may also involve some or all of the following limitations and risks:
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Long wait times for trees to be mature enough to harvest
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Unpredictable prices when selling trees due to commodity cycles
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Time, money and attention required to plant and maintain the trees and maintain the property
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Risk of fires, floods, hurricanes and other natural disasters
Low liquidity compared to most other investments can also be a problem. It can easily take a year or more to sell a piece of forest land and turn your investment into cash.
Investing in timber ETFs
Rather than directly buying forest land yourself, you can buy shares of timber-focused exchange-traded funds (ETFs). These specialist ETFs invest in shares of companies that own or lease forest land and harvest the trees for timber or other forest products. Buying shares of timber-focused ETFs allows you to gain asset diversification, inflation protection and other benefits of timber investing without the challenge and illiquidity of owning and manage the forest yourself. You will also benefit from additional diversification within the asset class, as these ETFs hold shares of a number of timber-related companies, reducing your exposure to weather, fire and other risks.
Timber ETFs include the iShares Global Timber & Forestry ETF and the Invesco MSCI Global Timber ETF.
Conclusion
Timberland investments offer a way to diversify your portfolio with real assets that can generate both income and capital gains. But buying and owning forest land requires in-depth industry knowledge and a lot of time and attention. Timberland is also a long-term game, often requiring years or decades to turn a profit.
Investment advice
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A financial advisor can help you evaluate alternative approaches to achieving diversification, inflation protection and other benefits of owning timberland. If you don’t already have a financial advisor, finding one doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors in your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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SmartAsset’s Investment Return and Growth Calculator takes a lot of the guesswork out of predicting your investment’s performance over time. Enter the amount of your initial investment, the timing and amount of any additional contributions, your expected rate of return, and the number of years you expect the investment to grow. The calculator will give you an estimate of the value of your portfolio, assuming all of these factors play out as expected.
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