Outdoorsy Investors — Or Anyone Looking for Stable Returns: Consider Timberland

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I try to skate to where the puck is going, not where it is. Over the past few years, “traditional” real estate investments have become extremely crowded, whether you’re talking about apartment investing, SFR, flipping, or wholesaling. Even assets like manufactured housing and self-storage are garnering more attention from investors than ever before. 

The results have been consistently increasing prices, lower cap rates, and overall lower expected returns on these investments. This is typical of any real estate cycle, and there will nevertheless continue to be opportunities to invest in these areas. However, with this series we’ll try to highlight some areas that you may not have thought about before.

Timberland investing options

Investing in timberland isn’t just about buying nice boots that pair well with flannel. There is something alluring, or even romantic, about the idea of owning a forest. If you are the type of person that considers more than just dollars and cents, this may be an area of interest for you. This could provide you with an opportunity to preserve your wealth, generate some cash flow, help the environment, and provide you and your family with some recreation.

Generally speaking, you should think of timberland investing as a low-return, stable investment vehicle that provides modest cash flow along with some appreciation and a great hedge against inflation. This wouldn’t be an area where you’d make a killing. There are a multitude of ways you can gain investment exposure, including:

• Outright purchasing of land, where you manage the forest (or hire out management) and contract for harvesting of lumber
• Purchasing shares of a timber operation, where you’ll take on the operational risk of actual harvesting and selling.
• Participating as a limited partner (LP), where you provide capital and rely on the expertise of a sponsor to find, perform due diligence on, acquire, manage, and eventually dispose of the real estate.
• Purchasing shares of a publicly traded timber REIT.

All of these options have pros and cons depending on your skillset, time, and inclination to get involved. This could range from passively owning recreational land that you occasionally allow a timber operation to harvest and replant to actively managing a large swath of land where you’re working to maintain or grow the overall yield through sustainable forestry practices while maximizing soil nutrients, tree species rotations, and even potentially profiting from non-timber products like fruits, nuts, or medicinal plants.

Why invest in timberland?

Sustainability

One counterintuitive benefit to putting capital to work in timberland is the environmental improvements you can create. By controlling land that is certified as sustainable by the Sustainable Forestry Initiative (SFI) or Forest Stewardship Council (FSC), you can contribute to the already-established trend of stable or growing forests in North America. According to the Food and Agriculture Organization, “Forest growth nationally has exceeded harvest since the 1940s. By 1997 forest growth exceeded harvest by 42% and the volume of forest growth was 380% greater than it had been in 1920.”

By committing investment funds in the space, you can help ensure that this trend continues.

Inflation hedging

Inflation is likely going to become a serious problem for this country down the road. Timber and other commodity-based real estate investments stand to perform extremely well in an inflationary environment, as the prices received for harvested timber rise alongside rising prices elsewhere in the economy.

Housing boom

We’re experiencing a bit of a housing boom currently, driven by low interest rates and a desire from consumers to move into suburbs. 

Single-family housing starts have remained low and only recently gotten back to 90s levels despite a far larger population, as builders had previously focused resources on apartments. With millennials aging and starting families, and a shift in preferences towards suburbs and more space, low mortgage rates have created the potential for a massive increase in home building.

 

This may lead to strong lumber demand for several years as the construction industry adapts to these changes. Here we see massive price increases for lumber as of late.

Appreciation

Expected cash-on-cash returns in timberland are fairly low. Roughly 3-5% unlevered cash-on-cash returns would be very solid on an investment of this nature. The flipside of that is the relatively low risk and appreciation you can receive. According to the Hancock Natural Resource Group, timberland significantly underperforms against stocks during strong years for the market. However, it is also nearly unheard of to receive a negative return in the space. Therefore, on a risk-adjusted basis, the asset class could make a lot of sense.

Potential risks in timberland

Increased regulation 

Environmental issues are front of mind for many politicians. Forestry, forest management, and the ways  we use natural resources may be subject to new or changing regulations should politicians attempt to target this asset class for climate reform. This may impact the amount of lumber that can be harvested and therefore land and resource prices. Thankfully, the industry has been proactive in sustainable practices and has been growing overall forest land actively. Regulation would likely have the impact of restricting supply, which could cause lumber prices to rise and land to therefore become more valuable.

Lack of expertise

There are myriad, drastic differences in timberland investing relative to more traditional real estate. Tree species, growth rates and patterns, pests, soil quality, protected animal species, and fires and other natural disasters are only a few of the issues that you’ve probably never thought about if you’re used to owning apartments.  Make sure you’re spending the time to get educated and/or working with experienced professionals to gain exposure to the space.

Wrapping it up

At the end of the day, investors with a certain risk/return profile could benefit from the stability, safety, and even recreational or ethical value in owning timberland. While you’re unlikely to hit it rich in the space, it could be a great way to preserve and steadily grow your wealth, providing excellent diversification away from typical investments like stocks, bonds, and traditional real estate.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.