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Can Timberland Be a Profitable Investment?

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Published on Tuesday, December 01, 2015 by Land Century

Timberland is an investment that many people fail to undertake. The main issue is that investors either don’t know about timberland, or they believe that this is not an investment that will provide exceptional profits in the long term.

Oftentimes, this is because research has not been done on the field by the investor. If the investor would’ve looked at the research, he or she would have seen that timberland provides an annual return of 14% on average. Also, you won’t have to deal with bullish and bearish markets as you would with the stock market.

A very surprising statistic shows that if you invested $10,000 in 1971, you would have $1.65 million by 2010 if your investment was in timberland. This beats stock market and bond markets dramatically. Using data from the stock market, you would have $1.5 million with a variety of fluctuations along the way. So, it’s safe to say that timberland is a very smart investment that can be even more profitable stocks and bonds.

Timberland Return Breakdown

Here's a rough breakdown of timberland that leaves approximately 4% left to allot. Statistically, the following increases will be seen in your investment:

* Land value will increase by approximately 1% per year.
* Biological growth of the trees will provide a 6% return.
* The price of the tree itself, called stumpage, will grow 3%.

The best part is that there will always be money and timber. Less volatile than the stock market, tree value continually grows with the tree.

Investing Properly

Investors will not want to go and buy a forest in hopes that they can cut down the trees and sell it. What you want to do is invest in what is called managed timberland. This means that you’ll have land that’s managed for you where managers will cultivate the trees, harvest the trees and look after them.

You can also pay someone to do this for you, or you could do it yourself if you have the knowledge. Typically, you're allowing a manager to make extra money by selling hunting rights, harvesting seeds and selling straw, or using the land in another way.

You need to also understand that your whole farm has a value. You can sell every piece of the land, and even the land itself if the right offer comes along. The trees will produce seeds which you can sell, the land can be rented for grazing or farming purposes, straw can be harvested and you may even find an investor that wants to buy your land. There are publicly traded companies that allow you to invest in their timberland, but you’ll find the greatest ROI if you own the land yourself.

And you’ll make a lot of money if you to own the land yourself. This means that you can have land that continually appreciates in value. You own the trees and the seeds, you have the right to use the land as hunting land to make extra money, and you’ll have a long-term investment that continually pays dividends. The one downside is that this is not a short-term investment. With stocks and bonds, you could sell them quickly to make a high return. But there's only so much you can do to grow your timber quickly.

If you’re looking to make money extremely quickly, this is not the right choice for you. Warren Buffett, master investor, states that the perfect investment is one that lasts a lifetime. This is the same mindset that should go into timber because you can make a lot of money as discussed earlier, but it will not occur overnight.

Individual Timberland is On the Rise

Two decades ago, 45% of all of timberland in the United States was owned by individuals. Now, individuals own 54% of timberland. This information is provided by the US Department of Agriculture, with 500 million acres of timberland in the United States.

Rough statistics show that 1 acre of timberland has a value of approximately $1,500. And this value increases dramatically if you allow the trees to mature for years. The best part is that this land can be purchased for $1,000-$1,200 an acre. You’ll also be able to find many properties where this land is much less expensive. Timber value per acre can be between $500 and $5,000, but this depends on the growth of the trees themselves.

Management costs per acre range from $5 to $45, so you’re sure to make your money back on your investment.
While the trees themselves mature and provide you with money, you're also going to have your land value increase. If you’re lucky enough to choose a piece of land in a prime location, the land prices will skyrocket and you'll profit in the future.

The best part is that there's a real return rate of 6% to 10%, with nominal returns of 9% to 15% on timberland. Investors will generate 65% to 75% through just the growth of the timber. The lifecycle of timber that is well-managed is 25 to 30 years. This is when a new rotation would occur, but before this happens, you’ll be harvesting the trees and selling them on the timber market. Reforestation occurs, and you're set to plant the trees all over again.

Using selective herbicide measures can increase your value by 300%. While you don’t need 100 acres of land to see a return, we’re going to show you what the value of the land will be if you own hundred acres of timberland.

* Natural growth in 30 years would provide $119,279 in timberland.
* Mechanical control will provide $312,589 in return.
* Selective herbicide control provides $444,714 in return.

It’s also very important to note that this is over a 30 year period. When natural growth is allowed to occur, the majority of the return will be seen between the 20 and 30-year span. The value of the land after just 20 years is $9,700, but the trees mature greatly at the 25-year mark and are worth $43,000, while at the 30 year mark, their worth $119,000.

In comparison, mechanical controlled timber has a value of $109,000 after 20 years, while selective herbicide control has a value of $261,000 after 20 years.
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