What You Should Know About Timberland Investing Part 1
When done right, timberland investing is a highly profitable endeavor. Since many investors only make use of mainstream options like stocks and bonds, and fewer people consider this unique investment option, there are some highly promising timberland properties for sale. As with any investment, it is critical to educate yourself and to work with experienced land professionals. If you are interested in purchasing timberland for sale in Florida, there are several things you should know.
A Brief History of Timberland Investing
Even though owning timberland has been a profitable endeavor since the first sawmills were built, investors didn’t consider it much of an option until the 70s. In 1974, the Employee Retirement Income Security Act, which encouraged institutional investors to diversify their portfolios in the form of options like real estate holdings, was passed by Congress. Of course, real estate holdings include timberland.
Subsequent tax law changes increased the amount of institutional investments even more. In 1986, a law was passed that prevented U.S. forest product companies from taking advantage of capital gain tax laws in regard to their timber harvests. Consequently, many of these companies began to sell their land to exempt investors such as endowments, foundations, and pension funds.
From 1986 to 2007, most forest companies switched their focus from owning large amounts of timberland to better monetizing the timberland they had. Many invested in wood processing facilities. Millions of acres of timberland were sold to:
- Charitable foundations
- Pension funds
- University endowments
- Wealthy individuals
Most are managed by Timber Investment Management Organizations (TIMOs). However, some forest management companies moved their holdings into Real Estate Investment Trusts (REITs) instead of selling.
Ways To Sell Timber
There are two main ways to sell timber after you buy timberland for sale in Florida. They are:
- Stumpage, or standing timber
- Logs or other finished products
When you sell stumpage, it’s up to your buyer to harvest and process the wood. This is the method of choice for most private timberland owners. If you choose to sell stumpage, you can sell by lump sum or sale by unit/scale.
As the name suggests, lump sum means you’re paid a total amount in advance of harvesting. The lump sum payment is based on an estimate of the timber volume, rather than the actual harvested volume.
Sale by unit, on the other hand, is when the buyer pays you for the number of trees they harvest. This is more precise, but more difficult logistically.
This article is continued in What You Should Know About Timberland Investing Part 2.