Investing in forest land suitable for timber production can provide you with income, diversification, inflation protection and more. Timber investment requires careful study of the industry, market and individual parcels and is generally a long-term endeavor that takes years to turn a profit. Additionally, Timberland is highly illiquid, so it could take a year or more to convert your assets into cash if needed. Speak to a financial advisor to learn how investing in lumber and other real assets can help you achieve your long-term goals.
Fundamentals of wood investment
Investing in timber is owning land on which to grow trees that can be processed into lumber. Wood is considered a real asset and is essential for the manufacture of paper, electricity poles and furniture, as well as for the construction of houses and other buildings.
Timber sales are rare as it can take decades for the trees to grow large enough to be harvested. In fact, as a timber land investor, you may only make a handful of timber sales in your lifetime. Timber investors can earn more regular income by selling seeds or leasing grazing land for livestock. Timberland can also be used for recreation.
According to the US Department of Agriculture, there are more than 500 million acres of commercial forest land in the United States. An acre of woodland can cost anywhere from $1,500 to $2,000, with prices varying based on location, road access, and species and maturity of the trees. The value of wood also varies depending on tree species, size and quality. According to TimberUpdate.com, which tracks prices and trends in the timber industry, prices can range from about $5 per ton for small, low-quality trees to almost $50 per ton for mature, straight trees that are in knots can be sawn. Free boards for decorative use.
Pros and cons of wood investments
Timberland has a number of characteristics that make it attractive to investors. These include:
Income from the sale of wood to sawmills
Inflation protection similar to other commodities
Diversification and risk management by owning an asset that is uncorrelated to stocks, bonds and other asset classes
Favorable capital gains tax treatment for most income
Appreciation as trees grow into more mature specimens that fetch higher prices
Sustainability, as trees fundamentally benefit the environment
Owning woodland can also provide you with an opportunity to personally enjoy an investment. A piece of woodland can even serve as a site for the construction of a second home or even a primary residence.
However, owning woodland may also entail some or all of the following limitations and risks:
It takes a long time before the trees are mature enough to be harvested
Unpredictable prices when selling trees due to commodity cycles
Time, money and attention required to plant and tend trees and maintain the property
Danger 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 and turn your investment into cash.
Invest in wood ETFs
Instead of buying woodland directly yourself, you can buy shares in exchange-traded funds (ETFs) that focus on wood. These specialized ETFs invest in stocks of companies that own or lease forest land and that harvest trees for lumber or other forest products. Buying shares of wood-focused ETFs gives you asset diversification, inflation protection, and other benefits of wood investing without the challenge and illiquidity of owning and managing the woodland yourself. You also get additional diversification within the asset class as these ETFs own shares of a range of logging companies, giving you less exposure to weather, fire and other risks.
Timber ETFs include the iShares Global Timber & Forestry ETF and the Invesco MSCI Global Timber ETF.
Timberland investing offers a way to diversify your portfolio with real assets that can generate both income and capital gains. However, buying and owning woodland requires in-depth knowledge of the industry, as well as a great deal of time and attention. Timberland is also a long-term company, often taking years or decades to turn a profit.
A financial advisor can help you evaluate alternative approaches to achieving diversification, inflation protection, and other benefits of woodland ownership. If you don't already have a financial advisor, finding one doesn't have to be difficult. SmartAsset's free tool puts you in touch with up to three verified financial advisors in your area, and you can have a free introductory call with your right advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
With SmartAsset's investment return and growth calculator, you no longer need to guess how your investment will perform 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 want the investment to grow. The calculator gives you an estimate of how much your portfolio will be worth, assuming all of these factors happen as planned.
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