Timber Investing for a Mustachian

[ryanht13]

Has anyone dabbled in the raw land/timber investing?
It can provide income through harvesting and hunting lease, tax incentives, recreational incentives, inflation hedge, and non-correlated movements. One negative (though I'm sure there is more) is liquidity. Does owning a forest have a place in the mustachian's portfolio?

[RichMoose]

I have not, but being from big British Columbia I know people that have and are very successful long term investors. I think the key to Mustachian investing is investing not gambling. Mustachians are not day-traders or people looking for a slight long off edge here and there. We invest for the long term based on sound fundamentals. In my view timberland investing is not much different from farmland investing in many ways (Warren Buffett's first investment). Does it cash flow? Is it low maintenance? Is it long term? Is it part of a larger, diverse portfolio?

[rmendpara]

No personal experience with any type of land investments.

I'll just add that you should remain aware that alternatives, as a percentage of your total investments, should generally be no more than 20%, save for the most experienced investors. What you earn in real returns you give up, in many cases, liquidity and the long duration of many investments of this type.

Of the few very wealthy investors I know, things like land, RE developments, metals, vacation rentals, commodities, etc, generally make up a modest or small portion of total investments.

[KD]

We have timbered properties (pine & oak).  One of which our home sets upon.  Didn't buy any of it FOR that purpose but I do have it in mind that further on in my life I might want to pursue a timber contract if there comes a time of need for it.  I have already been approached by two outfits.

There is likely to be a large timbered property left to me in family estate (over 1000 acres) that I will share in with my sibling IF family trust remains as it is now written. 

I have explained to those family members (niece & her hubs) that will be administering my estate on behalf of my children that it is there as a possibility of income production if need be.  Mainly went ahead and discussed in depth with them because it is something that many people do not think of pursuing.

[innerscorecard]

Could be good. There is value everywhere in the world. Just make sure you're not the sucker at the table, as with any more exotic alternatives.

[Mississippi Mudstache]

Well, this is right up my alley. I have a B.S. and M.S. in forestry, and I've worked for 2 of the big 4 forestry REITs. I previously worked as a field forester, but I now work in investment analysis.

I would say that I have very little interest in timberland from an investment perspective. There are just too many headwinds for a small, individual investor like myself. And I say that, even knowing that I'm more knowledgeable about forest investment and management than 99.9% of the landowners out there and should be able to spot an undervalued asset when I see one.

Allow me to outline a few of the problems that I see:

• Transaction costs are stupid high. Unless you're paying with cash, expect 6% closing costs to buy, then another 6% when you want to sell
• The realities of logging costs work against small parcels. In the South, the rule of thumb is that it costs an average logger $3,000 just to move his equipment to the next job. That number is going to come right of the top of what you earn from your timber sale, whether it's 30 acres or 150. And good luck finding a logger who is interested in thinning less than 40 acres, or clearcutting less than 20. Most won't enough touch areas that small, which leaves you a much smaller pool of potential loggers to work with
• The need to gain economy of scale to improve returns works against your portfolio. You'll need to buy larger tracts of timber (thus reducing the diversity of your portfolio) or you will need to manage a smaller tract as a single stand. This reduces your flexibility to time thinning and clearcutting. Flexibility is typically touted as one of the benefits of a small-time timber investor, but if the market is down when your timber is ready to harvest, then you're screwed. Sure, you can wait out the market, but you've already missed the optimal biological rotation age and your returns will drop with each passing year, even if timber prices recover.
• Don't forget that getting a huge chuck of income in a single year from a timber harvest is likely to incur much larger tax liabilities than small chunks sold over many years.
• Oh, and keep in mind that, because you'll (most likely) be looking at tracts that are under $1 million, you're going to be competing against wealthy doctors, lawyers, and businessmen who really just want a nice place to hunt deer and quail and don't really give two shits about timber income. Sure, they'll harvest a little here and there, and manage the land as a "business", deducting as many expenses as they can, but they'll be more than happy to accept 1% real returns. You need to be looking at $5 million or more if you want institutional investor pricing
• Also, since 2008, institutional investors like TIMOs and large trusts have been happy to buy up timberland at 4% real returns for the benefits of diversification. Only the timber REITs (WY, PCL, RYN) buy timberland these days with the expectation of 6% real returns or greater

Hope that gives you a good idea of what to look forward to if you hope to enter the world of timberland investing as small, individual investor. If you're honest with yourself, and you just want a recreational property/homesite that actually pays for itself instead of costing you money, then timberland is a great way to go. But there's just no good argument for investing in timberland as part of a diversified portfolio unless your portfolio is $5 million or more (in my opinion).

[KD]

Thanks Mississippi Mustache.  The two outfits that approached me were working in the area two properties down from us.  That explains it. 

[PEIslander]

My sister owns a rural property a few hours away from where she lives. She always thought the timber would fund her retirement. It wasn't to be. With her not living in the area someone went on the land and clear cut all of it! It was months later before she even found out. She never did find out who stole from her. The locals weren't talking even though in all likelihood they knew who did the cutting.

[Mississippi Mudstache]

Wow, that's awful. Timber theft is incredibly rare in the South, and it generally involves accidentally crossing poorly marked property lines. Most states impose fines of treble damages for violators.

[Rural]

We've gone the homesite route that Mississippi Mudstache mentions, sort of. We're sitting on 25 acres of hardwoods, and we've just applied for a conservation easement on the basis of the timber value. That will cut way down on our already low property taxes. We don't intend to harvest other than for our own woodstove, though.


So, some of the strategies can be applied to small tracts, but as an investment? I don't think there's any good way for that to work out with smaller acreages like ours.

[Mississippi Mudstache]

I knew a couple who planted a stand of 5,000 black walnut trees on family-owned land, to harvest the nuts and sell individual trees to woodworkers, as part of their retirement plan.  They were 25 or so at the time.  Sorry, don't know how that all worked out for them...the most important info.

I'm guessing not well.

[LiveLean]

I don't have Mississippi Mudstache's level of experience, though my father has invested in this field for 18 years and I cover the industry as a journalist. What MS Mudstache said is correct, though I'd add the following:

1. You have to treat it more as a business than an investment -- it's a lot of work. My dad has always bought tracts with a five-year plan. He can make boundary line adjustments, have it subdivided (if allowed), selling into smaller parcels, etc. You can thin the trees over time, which produces income. The pulp market has taken off in recent years and that has jumpstarted a timber market that went into hibernation during the recession.

2. It's a lot of frustrating work just to buy land. My dad has bought three parcels, all in the 700-1,000 acre range, in 18 years. He's looked at several hundred parcels. Sellers are often 2-3 heirs who can't agree on sales price, whether to let it go, etc. Or the properties are owned by timber/paper/other companies who put them on the market, take forever to get back to you on bids, and occasionally just take them back off the market.

3. Private forest landowners tend to fall into two categories. There's the second, third, or fourth generation folks who have inherited the land and continue to reap the benefits of a renewable resource for which little was paid for originally. (And, of course, they inherited it). Then there's the folks who see it primarily as a hunting/fishing/outdoorsy parcel to use and they raise trees to pay taxes and perhaps make a modest income from it.

4. You have to really know the area you're considering. And if you're new to this, you probably don't since timberland tends to be off the beaten path. My dad has lived in Virginia for 45 years and you'd be hard pressed to find a piece of it he hasn't stepped foot in or near.

[Rural]

I knew a couple who planted a stand of 5,000 black walnut trees on family-owned land, to harvest the nuts and sell individual trees to woodworkers, as part of their retirement plan.  They were 25 or so at the time.  Sorry, don't know how that all worked out for them...the most important info.

I'm guessing not well.

I'd guess the same. The nuts are a stone bitch to use*, and in an area where the trees will do well, you shouldn't have to plant them.


* I cook with black walnuts, native wild-growing, so I know. Can make a good hair dye from the hulls, too, though I've never mastered not also dying my hands and part of my face.

[Mississippi Mudstache]

To clarify, the black walnuts were not planted in AB.  Somewhere in the USA where they'd thrive.  Perhaps you suspect not well for purely economic reasons though...

Purely economic reasons. Black walnuts are not a great orchard crop. They have thick husks and little meat in comparison to other nuts. If you want to earn money with a nut orchard, then great. Move to Georgia and plant pecans or to California and plant English walnuts. You'll be using improved varieties for the greatest yields and the best prices, so of course you'll be planting improved cultivars grafted onto specially selected rootstocks. To do otherwise is penny wise and pound foolish. Of course, using grafted varieties means you won't get attractive sawlogs from the trees when they are mature in 50 years. And yes, if you're a woodworker (like me) then I'm aware that people pay lots of money for grafted walnut lumber. Prices are high because of the difficulty of processing the lumber, and because there is only a small amount of usable wood in any given tree. The people who earn the high prices are the people who process the logs, not the orchard owners, and they earn it. But let's assume that they just planted wild-type black walnut seedlings and earned a pittance from the nuts (it could be a decent amount, actually, with 5,000 trees, but most of the money would go to labor, not investment returns). We'll assume that the trees were pruned well as they grew to ensure top-quality sawlogs. After 40-50 years, the trees are finally ready to harvest, so now all they need is for 5,000 woodworkers to come pick out a tree, saw it down, load it up, haul it to a sawmill, pay the sawyer to mill it into lumber, dry it for 1-2 years, and of course, pay the orchard owners, $200 apiece for the privilege, and they're millionaires! Of course, they may convince a half dozen woodworkers to buy into such a scheme, but most of them just want lumber that's already been sawed and dried. So now the orchard owners have to cut the trees down themselves, and haul them to a sawmill, or better yet, buy a sawmill themselves! They can saw it and sell it themselves and pocket all the profit! But don't forget the huge barn that they now need to build to dry thousands of board feet of lumber. And they have to market and sell every bit of it.

Anyway. That was probably more detail than you want. Trust me, I've seen this story before. In fact, I mill and sell lumber myself on the side. So does my dad. But it is a real job, and real work. It's not a passive investment. Not even with $walnut$, which is the most overhyped lumber in the history of lumber.

[Mississippi Mudstache]

You have to treat it more as a business than an investment -- it's a lot of work.

Yes, +1000

I'm not spilling pixels here to convince anybody that there's no money in timberland, even small parcels. Most certainly there is. But unless you have amassed a huge portfolio that generates enough returns to pay people to manage the resource for you and still have enough left over for a decent return, then it's a business, not an investment.

Case in point: my dad also has a mobile sawmill, and he travels to peoples' farms and their trees into lumber. This is his retirement job, and he loves it. He also has about 10 acres of nice, mature pines. He would get a pittance for them if he sold them to a logger, because the parcel is so small. So instead, he advertises green pine lumber for $0.50/BF. When he has an order, he finds the right tree, cuts it down, and mills it into lumber on the spot. It's a better price than you can get at any lumberyard, and he earns far more than he would earn selling the trees to a logger, even accounting for his own labor. Win/win. But, it's a business, not an investment, and it would be foolish to confuse the two.

[skyrefuge]

Well, this is right up my alley. I have a B.S. and M.S. in forestry, and I've worked for 2 of the big 4 forestry REITs. I previously worked as a field forester, but I now work in investment analysis.

I would say that I have very little interest in timberland from an investment perspective.

Damn, that was one hell of a post.

I've been thinking a bit lately about "how to we choose whose opinions to trust and whose not to trust" (and why are some people better at this choosing than others, etc.)  I didn't know a damn thing about timber investing, so I had no basis on how I would place my trust in one view vs. another, but this was a top-notch example of how a post generates its own trust. A modest claim to experience (which is generally worth very little on its own), then backed up by solid point after solid point, in plain, readable English, where not a note rings false. And then my trust is maintained as further posters back up the points. Well done.

Now we know where to send people when this topic comes up again! (I've seen it once or twice here before.)

[hodedofome]

My grandpa swears you can make a living from timber, but I think he's probably so happy with the money he gets from natgas drillers in between the trees on his land that he forgets what his real returns are.

[Mississippi Mudstache]

Well, this is right up my alley. I have a B.S. and M.S. in forestry, and I've worked for 2 of the big 4 forestry REITs. I previously worked as a field forester, but I now work in investment analysis.

I would say that I have very little interest in timberland from an investment perspective.

Damn, that was one hell of a post.

I've been thinking a bit lately about "how to we choose whose opinions to trust and whose not to trust" (and why are some people better at this choosing than others, etc.)  I didn't know a damn thing about timber investing, so I had no basis on how I would place my trust in one view vs. another, but this was a top-notch example of how a post generates its own trust. A modest claim to experience (which is generally worth very little on its own), then backed up by solid point after solid point, in plain, readable English, where not a note rings false. And then my trust is maintained as further posters back up the points. Well done.

Now we know where to send people when this topic comes up again! (I've seen it once or twice here before.)

Well shucks. Thanks for the vote of confidence :)

If there's a reason I seem particularly spirited in my critique of the timberland investment from a small investor's point of view, it's because it used to be a dream of mine. Three years ago, if you had asked me what I wanted to be doing with my life by the time I was 40, I would have answered that I wanted to own, manage, and make a living off of my own tract of timber. As I've begun to delve deeper into the world of investing and early retirement and gained experience as a forester, I've been forced to come to terms with the harsh realities of timber investing, and to modify my plan accordingly. Really, the list I came up with above is just a partial list of the headwinds that small investors face when considering timberland in comparison to more conventional investment vehicles. I could go on for pages.

Basically, this is where I now stand: I still hope to own a small tract of timberland in some point in the future. However, it's now more of a question of: "How much of my net worth am I willing to hold in a marginally productive asset that contributes great benefits towards my quality of life, but relatively little in the way of monetary returns?" I have to balance my desire to own more land with my desire to retire early; I view the two goals as at odds with one another, not complementary.

[Mississippi Mudstache]

My grandpa swears you can make a living from timber, but I think he's probably so happy with the money he gets from natgas drillers in between the trees on his land that he forgets what his real returns are.

He's fortunate to have the mineral rights to his land. Most nonindustrial private timberlands in the South had their mineral rights stripped from the title decades ago. The exception is Louisiana, where mineral rights revert to the present owner if not exercised within (I think) 10 years.

[KD]

Could be good. There is value everywhere in the world. Just make sure you're not the sucker at the table, as with any more exotic alternatives.

Great thought innerscorecard.  My Dad is/was very entrepreneurial and sold lots of things off his properties over the years adding to the value...boulders to landscapers, animal manure, allowed others in to pick bramble fruits (although this was more of a ministry he did allow poorer families of 2 widows w/children in the neighborhood to come onto the land to pick at a VERY nominal fee so as not to feel like charity cases), as a child I picked up pine cones, pecans & blackberries to market, sold easements to local town water utility to place their tower, deer leases, grazing leases, etc. 

An optimizer.  It's a lesson well worth learning. 

@Mississippi Mustache - what is your opinion of coppicing trees to add to the timber value of a piece of land?  Worth the effort on a larger scale? 

And, on land as a retirement vehicle - If the holding costs are nominal what value do you see in raw land as a buy/hold/sell when a cash influx is needed retirement program?

[brooklynguy]

I've been thinking a bit lately about "how to we choose whose opinions to trust and whose not to trust" (and why are some people better at this choosing than others, etc.)  I didn't know a damn thing about timber investing, so I had no basis on how I would place my trust in one view vs. another, but this was a top-notch example of how a post generates its own trust. A modest claim to experience (which is generally worth very little on its own), then backed up by solid point after solid point, in plain, readable English, where not a note rings false. And then my trust is maintained as further posters back up the points. Well done.

This is an interesting observation.  I think the topic of how to know which opinions to trust may deserve its own stand-alone thread.

I often find myself unconsciously using the writing quality of a given post's prose as a yardstick for the trustworthiness of its message, but of course that is a flawed approach.  I suffer from the same problem when I read U.S. Supreme Court decisions (which is more fun than it sounds -- as with much of the content of this forum, the witty and articulate writing by a collection of talented wordsmiths makes for some highly entertaining reading, even in the case of ostensibly dry subject matter).  I usually disagree with Justice Scalia, but the man is such a gifted writer that it's often difficult to keep from nodding along in agreement as you read his compellingly argued, lucidly written opinions.

Thankfully, to your point about back-up from other posters, this forum is a veritable well-oiled marketplace of ideas, populated by a critical mass of razor-sharp, well-informed participants standing ready to correct factual errors and faulty logic.  And the high-quality, fiercely intelligent writing on display in these boards only reinforces the efficiency of that marketplace, as the entertaining and thought-provoking posts help attract and retain other valuable contributors.

So it might be worth starting a new thread to continue the discussion on this topic (instead of burying it inside an esoteric thread on an exotic asset class) to share ideas on identifying trustworthy content (and, for that matter, to continue the self-congratulatory collective back-patting for this forum's status as the home of the smartest minds on the internet!).

[hodedofome]

My grandpa swears you can make a living from timber, but I think he's probably so happy with the money he gets from natgas drillers in between the trees on his land that he forgets what his real returns are.

He's fortunate to have the mineral rights to his land. Most nonindustrial private timberlands in the South had their mineral rights stripped from the title decades ago. The exception is Louisiana, where mineral rights revert to the present owner if not exercised within (I think) 10 years.

He was an accountant for oil and gas companies all his life, so he knew the benefit of keeping the mineral rights. Whenever he sold land, he never sold the rights. The land he currently owns in East Texas (roughly 550 acres or so) was not necessarily for timber, he just decided to put timber on it to make it productive. Then he allowed natgas drillers on it starting about 10+ years ago. I don't know when he originally bought the land, probably at least 20 years ago.

[Mississippi Mudstache]

@Mississippi Mustache - what is your opinion of coppicing trees to add to the timber value of a piece of land?  Worth the effort on a larger scale? 

I think you'll have to be more specific. Coppicing refers to a method of regeneration that is possible with some species of hardwood, wherein the trees are cut back and allowed to re-sprout from the roots. You can get any number of products from this method of regeneration, from withies (slender branches for wicker-work) to firewood to sawtimber. What species would you consider coppicing, and what products would you expect to produce?

And, on land as a retirement vehicle - If the holding costs are nominal what value do you see in raw land as a buy/hold/sell when a cash influx is needed retirement program?

I would ask what the benefits of owning land are in comparison to bonds and equities. With land, you get high transaction costs and an illiquid asset. If you need a cash influx in a hurry, I think land is not optimal.