How to Manage Timberland Investment Risk
There are potential risks associated with any land acquisition, but when evaluating these risks in regards to purchasing timberland for sale in Florida, risk mitigation is crucial because of the length of time necessary to recover a return on investment. These include physical risks such as insects and forest fires, and financial risks such as increases in energy costs or interest rates.
When evaluating risks, investors should look for possible deviations from expected outcomes to prepare for these factors before they occur. To assist in managing and understanding these risks, our land experts have outlined some important areas to explore before purchasing Florida timberland for sale.
Types of Potential Risks
The first step to managing risks is by understanding them. When it comes to timberland property, there are 4 classifications of potential risks.
1. Physical Risks
Physical risks can be defined by factors affecting the quality or volume of timber output. These are often biological and elemental forces like forest fires resulting from a harsh drought or diseases that will affect tree health.
2. Financial Risks
Financial risks most often involve increases in price inputs, such as seedlings and fertilizers and decreases in price outputs, such as pulpwood and timber.
3. Operational Risks
Operational risks are those that affect the workable conditions of the land. This is caused by any force that limit’s land accessibility, most commonly environmental factors such as hurricanes, heavy rainfall, or forest fires.
4. Regulatory Risks
Regulatory risks are changes in local and national governmental policies that institute land use regulations or changes to operational procedure requirements, both of which may reduce efficiency and increase short and long term costs.
How to Manage Potential Risks
One of the most effective ways of managing risks is by accurately depicting the land profitability and future cash flows with a risks analysis. This should begin with data collection on each of the four risk factors. Based off of this information, you can create a risk management model that shows the potential frequency and severity of each of the aforementioned factors. The purpose of the risk management model is to turn quantitative data into a tool to better understand the risk profile of the timberland property.
Once the analysis is complete, you should have an accurate idea of the financial impact associated with each risk factor. This allows for the development of risk management plans that tackle problems which pose the greatest threat to profitability. It is important to keep in mind that risk analysis tools are not meant to be a once and done static resource. To be effective, they should be updated regularly to reflect changes that naturally occur over time.
Florida timberland for sale can be a very attractive property to add to your investment portfolio, but along with the potential returns, comes potentials risks. The first step to managing these risks is through understanding the four risk categories, physical, financial, operational, and regulatory. Then, by gathering quantitative data for each risk factor, you have the ability to create a frequency-severity risk management model. This allows for proper risk management and property valuation. It is always recommended to consult with land acquisition experts before investing in timberland for sale in Florida.