Why Should I Invest in Pine-Producing Timberlands?

With the condition of today’s economy, many people are very cautious about where they invest their money, and rightfully so. They want to make sure the assets they hold are stable in value and hopefully appreciate, produce a return, and remain relevant in an ever-changing future. They are looking for assets with a proven track-record to do this with. Time-tested if you will. If that’s you, then lets talk about investing in pine lands, that is land that produces wood fiber from the pine tree plantations growing on it. If that sounds sort of old-school to you, it’s because it is. It’s not the next big thing, the newest investment fad, or even the swelling bubble that could bust at anytime. Savy investors have been putting their money in pine lands for several generations. Indeed generational wealth is built on ownership of commodity-producing land, and has been down through the ages.

The mechanics of the pine land investment are not complicated. You buy land to grow trees on. The trees grow, and then you sell them. Then replant and restart the process again. In the mean time, the value of the land those trees are growing on goes up. Production and appreciation built into one investment. Plus you can use the land for recreational activities like hunting, hiking, camping, and other outdoor pursuits. Many timberland investors have a weekend cabin on their timberland investment. Try doing that on your electronically-traded stock. If the outdoor pursuits don’t float your boat, then simply lease the recreational rights to the property out to someone who values them…BAM! Another good return on investment opportunity associated with owning timberland.

Land holds real worth. It’s substantial, and it will be there. Land holds its capacity to produce, which is the measure of true value, no matter what the economy is doing. Land is a requirement for humankind. We all live on it and survive on the things it produces. It’s necessity is not going away. Simple supply and demand forces appreciation in land. Everyday the world gains population. Land is in limited supply. A greater demand on a limited supply of any good results in a higher price for that good.

The uses for wood fiber are constantly increasing. Our ability to utilize portions of the tree traditionally considered refuse has improved in the last decade. Indeed wood will figure prominently into our renewable energy equation for a “greener” future. All of this makes the wood fiber growing on pine lands more valuable in our world economy.

So why would you invest in pine lands over other agricultural lands or other timberlands? Pine lands have easy ownership, and professional management of this asset is easily attainable, and relatively inexpensive as compared to the more labor-intensive lands involved in agricultural production. The commodity that is produced, pine wood fiber, can be harvested in conjunction with optimal market times, instead of the “harvest season” that other ag production lands are limited by. The pine lands owner can simply wait for a good market to sell their timber, and the timber will continue to grow in the interim. Most of today’s investors prefer a more hands-off approach to their investments. They prefer to allow the investment to work for them, rather than the other way around. Investing in row-crop and pastureland involves some management of the land on an on-going basis…even if you rent the land to a farmer. Pine plantations do require management, but not nearly on the same level or frequency. Pine lands produce wood fiber at a rate greater than lands growing other types of trees. More fiber in less time = better investment. Because of the uniformity of pine lands, management practices can be applied more consistently and more economically. There is greater competition to buy your product than with other commodities who likely only have one or two potential buyers in a market area. Anywhere that timber is grown you will find multiple buyers of that commodity that are accustomed to “bidding” to buy your commodity. Capitalism at work!

Don’t take my word on this, do a little research on your own. Look into what the value of timber-producing land has done in the last 30 years, which is the length of a typical growth cycle. Find out the types of returns you can expect during that growth cycle. (It’s been around 15% annual return on investment during that time frame) If you will do that, I am convinced that you will understand the necessity of holding timberland as part of your investment plan. You will find out that those that invested in pine production land 30 years ago have outperformed those that made the same investment in the stock market for the same period of time. Look at the appreciation, the returns from timber sales during that time, the returns from hunting leases, and the recreational value that they have received from it. Investing in pine lands is a longer-term investment than others that you can put your money in, but the wise and patient investor will understand that a safe investment in growing trees, one that you can have confidence in it’s ability to positively affect your portfolio year in, year out, will trump shorter-term, more risky investments.

According to the article “Timber Investing: The Inflation Hedge That Pays Off in Every Type of Market” by Larry Spears in Money Morning, during the period from 1973 to 1981 when inflation was over 9% per year, timberland values increased an average of 22% per year and that on average, over the last 100 years, saw-timber prices have increased almost 5 % per year. The article also states that during the Great Depression, when stocks dropped 70%, timber gained 233%. During the period of 1987 through the present, timber has outperformed the S&P 500 15% to 9.6%. He goes on to state that the world’s supply of timber-producing lands are contracting. This means that the ever-increasing population will have to make do with less of a necessary resource, which makes timberland a great investment for the future.

So there you have it. Every reason that you need to invest in pine-producing timberland. The investment produces good returns with minimal management. If the market is bad when the timber becomes merchantable, you can simply wait for a better market, while the trees continue to grow. The forces of supply and demand work in favor of the land investment. The land holds the real value of production capacity no matter the economic times. The uses and demand for wood fiber are increasing. Timberland investments consistently outperform other long-term investments. You can use your investment for your own enjoyment. Pine trees grow faster than other types of trees. Smart rich people do it, have done it for a long time, and will continue to do so. You can start on your way to becoming one of those people with your investment in pine lands.

Navigate for Real Estate Using Mapping Technology

I ran across this article about using current mapping technology in your land search and thought it would be helpful information for you.  It is from Cooperative Farming News, a publication of the Alabama Farmer’s Cooperative, and is written by John Howle from Heflin, Alabama.

Here is a link directly to the article:

Navigate for Real Estate Using Mapping Technology

Closing Costs: Who Pays What?

I just completed an article for the LandThink Blog entitled, “Closing Costs: Who Pays What?”  I know many of you don’t deal with real estate and land transactions nearly as often as I do.  These things can be confusing to anyone.  As the article states, closing costs are negotiable.  However, who typically pays what varies by type of property and area the property is in.  Many times, negotiations hinge on the payment of closing costs.  Some services are done for the benefit of one party or the other.  Take a look at this article, hopefully it will help you to be more informed in your next transaction.

http://www.landthink.com/closing-costs-who-pays-what/#comment-833

Title Searches, Abstracts, and Title Insurance

Here is an article that I wrote for the LandThink Blog that explains what a title search, abstract, and title insurance is.  There is also information there about when you need each one and what the differences between them are.  Go on over to the LandThink Blog and take a look.

http://www.landthink.com/title-searches-abstracts-and-insurance/

LandThink Blog – How do you value bare dirt in timberland?

I just read this article over on the LandThink Blog.  It has some great information about how to get at the intrinsic “dirt” value of the property that timber is growing on.  I think it is very important to remember, as with all things real estate, that location is everything.  Here is the article:

How do you value bare dirt in timberland?

By Curtis Seltzer
LandThink.com
October 26, 2010

I have a rule against giving my time away for free, which I am trying to enforce more diligently than when I was 30 when I had more time to give away.

An appraiser called last week with a question that snagged me before I gathered my remaining wits enough to start charging. He asked: “How do you determine the bare-dirt value of timberland?”

As with so many other questions that arise as you get older, there’s no easy or simple answer.

Bare dirt doesn’t exactly have a clear definition in the field, and it is equally fuzzy when trying to put a dollar on it. So let’s say for the purpose of getting started that bare dirt refers to timberland that contains no merchantable timber value and no pre-merchantable timber value. Think of a total clear cut, down to the stumps.

READ THE ENTIRE ARTICLE HERE:
How do you value bare dirt in timberland?

Buying Land with Cash

Most land and farm transactions I work with are cash transactions. This is not to say that I work with only the independently wealthy. The majority of people that pay cash for a property have recently sold some other type of investment and are simply moving that investment into another investment that works better for them.

Many investors prefer the cash method as it is the most hassle-free and gives the buyer a negotiating advantage. The general thought is that a cash offer is stronger and that because the terms of the offer are stronger, the investor can offer a lower buying price. The seller perceives that they are dealing with a financially-able potential buyer and will usually give them more consideration. If the seller happens to be time-motivated in selling his property, cash makes an impression as well. Generally, a cash buyer can perform on a contract much quicker than one who needs to borrow money. Time is money, and it is never more true than in negotiating a real estate transaction. Of late, buyers that must borrow funds to close a transaction have taken anywhere from 15-45 days longer to close than transactions that were made with cash. A cash offer is a definitive statement from the buyer that says, “I want the property at this price and I can buy it.” Many times today, buyers want a property at a given price, but cannot close on it due to financial difficulties. Informed sellers are aware of this, so a cash offer gets their attention.

The Million Dollar Question – Where is the Land Market headed?

Everybody that I know wants an answer to that question.  Nobody that I know has a firm grasp on anything that can totally predict it.  There are simply too many variables for that to be a “known.”  But, that does not stop us from giving it a go.  Those of us that consider ourselves land professionals like to think we can predict the market.  I’ve got a feeling that those people we dispense our knowledge upon look at it with slightly more doubt than the prognostications they hear from their local meteorologist during the evening news. However, as professionals do, we push onward.

Beginning in Spring of this year, LandThink.com conducted an online poll of buyers and sellers of land.  Among the questions posed to the respondents was, “Where do the you think we are in the current land real estate market?”.  The answer from the 860+ respondents was a collective, “I have no idea.”  Just over 21% of those polled think we are currently at the bottom.  Almost 17% thought that the bottom has already passed.  43% think we will find the bottom within the next year, and 18% said that we were not within site of the bottom.  I think this is very similar to the collective of what I hear from customers day in, day out.  It’s not uncommon for me to spend 15 minutes on the phone with someone that is completely convinced we are headed for a deep, deep depression.  I think some of this is gamesmanship in trying to get a better deal though.  I also spend a great deal of time talking with those that think the worst is behind us and are thinking of dipping their toes back in the water of real estate investment.  Ironically, uncertainty about the market keeps driving the uncertainty of the market.  It makes one think that knowing for certain the market is still headed down might somehow give us a better map out of the entire mess.  Indeed, I know another land broker that, about a year ago, told me, “I’m ready for the market to go ahead and fall off the cliff.  Then we can sort it out.”  I’m not so Gung-Ho on his notion, but I can almost see the logic.

Yesterday, at the LandThink Summit, Mr. Barry Gittleman of John Wieland Homes and Neighborhoods, dissected the Atlanta metro area residential market to us.  Using data from the MLS there and in-house sources he presented the numbers in such a fashion that would lead you to believe that the low point in that market is in sight, but not past, and that Spring 2011 should see some improvement…however slight.  In that the land market has tended to lag behind the residential markets and has been infinitely less volatile, I think that it is logical to conclude that those land markets that are so heavily influenced by those living in the Atlanta area are going to continue to be remarkably flat.  Once there is significant improvement in the residential market there, look for the land market to improve marginally within a few months.  I would imagine this to be true for the influence on land prices around any major metropolitan area.  Indeed out West, where some of the first severe corrections occurred in the residential market, and have since began a rebound, you can see an uptick in the land market as well.

Specific to my area here in East Central Alabama, we have a great deal of influence from Atlanta and Birmingham.  Birmingham did not quite reach the highs that Atlanta did during the boom and has not seen the same kind of lows that Atlanta is now suffering.  That has served to temper the market here in rural East Central Alabama in comparison to what it would have been had Atlanta been our only metro-area influence.

Timberland and timber markets were also discussed heavily at the LandThink Summit.  Unlike some of our other discussions, the general thoughts on timber markets were more positive and had less uncertainty.  This leads to a more predictable timberland market.  One of the most notable pieces of information that I gleaned from the discussion yesterday was that paper companies were back into the land market…as buyers.  This definitely signals that there has been enough of a price correction on timberland properties to make the managers and economists with those companies think owning land for growing trees might be profitable again.  Private investors should take note of this.  With the more specific management a private investor can provide on a property, he should be able to squeeze out a profit, even when the institutional investors cannot.  This represents opportunity.

The timber markets are being strengthened from the bottom.  The more uses there are for a particular commodity, the more demand there should be for it.  Biomass and biofuels  are beginning to put a bottom-certain in the pulp markets.  While both biomass and biofuels can use forest refuse in production, it may be more cost effective to use pulp as an input that is currently easier to transport and more consistent.  In the future I see both pulp and forest waste being substituted for one another in these production processes.  This gives the timberland owner the opportunity to extract some value from forest waste that has traditionally gone unused and has even been a net cost to the owner due to clean-up.  This, in turn, helps the value of timberland.  There were several other ideas presented that indicated a favorable outlook in the timber markets.  I will leave that to someone more qualified than I to present.

The general notion that I took from the discussions was favorable for timberland investments.  The low cost of money right now figures heavily into this.  For private investors, the Farm Credit lending cooperatives are offering fairly good financing terms and ultra-low rates on good timberland properties.  They are also in tune with the production cycle of timberland and are willing to work with those cycles in your repayment plans.

So, here we go.  The answer to the million dollar question.  Maybe.  Timberland is a buy.  If you have some holding power, transitional lands (land that is moving from one use to another due to market forces)  purchased at current markets will look like great investments in 5-10 years.  If you are someone looking to buy 40-100 acres in the country that you will use for a retirement homesite or getaway place, and have the funds for a 20% down payment, I think now is a good time to make that investment.  I do not foresee a significant drop in prices on the horizon.  I see the general market staying flat for a couple years…but not interest rates.  Fortunes are made by those who buy low and sell high.  Today represents an opportunity to buy low with cheap funds.  Can you buy lower tomorrow?  Maybe…but not alot.  Will you be able to borrow money tomorrow as cheaply as today?  Not likely.   If you have been waiting for someone to tell you it’s time…It’s time.

In a year from now, you will know if you can look back at me as someone who is LandSmart or not!  Until then, it’s just an educated guess.  Just like the weatherman.