Is Timberland a Good Investment?

Many dream of buying forest land. For most, it is seen as a way to be able to hunt on their own ground or a place to build a cabin or recreational property, but what about forest solely as an investment asset? Is timberland a good investment? While it may come as a surprise to many, timberland properties are excellent investments that come with a wide range of benefits to a portfolio, including an admirable rate of return. It is also one of the most time-tested and robust assets known to man. In fact, I will make the argument here that timberland is one of the most risk-free assets possible. However, there are disadvantages and special considerations to investing in timberland that you should be aware of. In this article, we will tell you everything you need to know to see how timberland stacks up as an investment.

What is Timberland and How Does It Work for You?

First, let’s talk about exactly what timberland is and how it works as an asset. Timberland is forested (or mostly forested) real estate that produces value primarily through the production of timber. However, it may also hold value for development, especially for recreational properties. As such, timberland can produce income for the landowner in a variety of ways.

Cash flows

The primary income timberland produces for its owner is through timber. Typically, a landowner will sell the right to sell timber to loggers and receive stumpage as compensation. Stumpage varies dramatically based on a litany of factors (we have an article on the subject you can read here), but it is typically anywhere between one and several thousands of dollars per acre.

Contrary to popular belief, cash flows from timber harvesting are not necessarily few and far between. By breaking down a larger property into more manageable sub-units, harvests can occur more frequently and at regular intervals. If you want to learn more, we have an article on how often timber can be harvested here.

Timber is not necessarily the only cash flow a timberland property can provide, however. Other cashflows to the landowner may include hunting leases, cabin leases, carbon sequestration, and depending on the locale, leases for mineral exploration and mining, wind turbines, and more.

And of course, beyond cash flows, timberland can provide additional return through the appreciation of the bare land value.

Expenses

Timberland is not without its expenses, of course. The primary expense a landowner will pay will be taxes. However, most states have programs for reduced property taxes for timberland properties, such as the Maine Tree Growth Tax Law, which greatly reduce the tax burden of these assets. You may, however, need the help of a forester, lawyer, or accountant to get yourself set up.

Luckily, all other expenses are going to be closely linked to revenue-producing activities, such as road construction and upgrade (which is paired with an income-producing harvest) and silvicultural activities like planting and pre-commercial thinning (which are linked to vastly improved revenues in the future).

Diversity

While timberland also produces “only” timber, timber includes a great diversity of products that helps diversify the industry at large. Products from a forest include dimensional lumber, paper and tissue products, oriented strand board, firewood and biofuels, veneers, high-grade lumber for furniture and more, and a plethora of smaller markets for products like toothpicks, tongue depressors, drumsticks, and more. In my experience in the industry, it is often the case that while one of these industries is in a slump, another is booming, which helps stabilize revenues.

Timberland Returns

Let’s skip to the chase and discuss the returns of timberland. Obviously, it is difficult to nail down exactly what a rate of return is because the reality can be incredibly variable depending not only on market conditions but how you choose to invest. For example, purchasing an individual piece of property will inherently be less diversified, and so the rate of return will be more dependent on the specific qualitative and quantitative attributes of that particular property. In other words, whether that timberland is a good investment will be dependent on the species composition, quality of stems, and the local forest economy. On the other hand, investing in REITs such as Weyerhaeuser can diversify the attributes of the land, but may leave you more exposure to the individual REITs business and financial strategies, which don’t necessarily reflect the returns on the land itself.

That said, JP Morgan Chase claims timberland has produced an annualized rate of return of 8.9% over the last 30 years. Not too shabby. Additionally,

Timberland Risk Profiles

As anyone familiar with finance can attest, focusing solely on the returns of an asset can be misleading. As they say, previous performance is no guarantee of future results, and focusing on past returns of an asset can obfuscate the true risks. And (in my humble opinion) that is what potential timberland investors should really focus on when investing in timberland–the lack of risk.

Of course, if you didn’t lose money every time someone told you something was risk free, you would probably be rich by now, so let me make my case. First, yes, of course there are risks in holding timberland, and these risks include market downturns, insect infestations, and wildfire, but these risks won’t lead to bankruptcy (discounting the possibility of any financial schemes you cooked up under the surface). Instead, they only reduce the return over time. The trees will grow back. The market will almost certainly recover, and you can always sell the real estate. If you still don’t believe me, let’s compare timberland to other popular forms of investment.

Timberland vs. Stocks

Granted, equities have historically been viewed as a riskier asset, but how do they compare to timberland? Over the past forty years or so, we have been in the greatest equity bull run the world has ever seen, which has put the financial world in a bit of a trance. We have forgotten that over the bulk of the 20th century, stocks barely made any gains thanks to momentous declines in the 1930s and 70s that took decades to recover from. The only consistent return stocks generated were through dividends. All the while, the underlying companies that provided these dividends were liable to go bankrupt through financial or political turmoil, and such turmoil was in no short supply in the 20th century. Even mass diversification wouldn’t have been able to totally protect you from these risks.

Trees, however, continued to grow through the great depression, WWII, and the inflation of the 1970s. Though the industry was in a slump through many of those years, timberland remained a good investment over time.

Timberland v. Bonds

Stocks are known to be risky, but bonds have historically been seen as the safe haven. Are they safer than timberland? I should say not. Bonds are arguably the asset that gives the highest exposure to political risks. Take Germany for example. If you purchased a German bond in 1916, you lost. If you bought a German bond in 1936, you lost. If you bought an East German bond in the 1970s, you probably got scammed because I don’t think they issued bonds. Bonds leave you exposed to macro economic disruptions as well as political disruptions such as war, revolution, and national fiscal irresponsibility.

In the modern world, it is specifically US bonds that are seen as the global standard for a safe haven asset. Will this remain the case for another 100 years? I have my doubts, but I know that if I bought 1000 acres of timberland, that land will still be productive in 1000 years. Granted, by then we may have moved past building homes with 2x4s.

Timberland vs. Gold

What about gold? Surely gold is the safest asset there is. After all, gold has more or less been able to hold its purchasing power over thousands of years. Yes, that is true, and it is also the problem with gold. It isn’t productive. All it can do is sit there and be a shiny rock, holding its purchasing power. All the while, you are incurring storage costs. The United States protects its gold with one of the most secure military bases of all time. How much would that cost over the course of 5000 years? Meanwhile, a plot of land will easily produce 100% its value in timber at least every 30 years. Potentially far more with proper management.

Timberland vs. Other Types of Real Estate

Perhaps you are thinking that timberland is safer than stocks and bonds but is still comparable to other forms of real estate like rental properties or farmland. Wrong again. Timberland is far safer than either for the simple reason that timberland can be totally ignored. In fact, one of my properties is an old farm that was abandoned in the late 19th century, and one only needs to look at pictures of Chernobyl to see what happens when homes and urban infrastructure ignored. Timberland is the default state of real estate.

This is an important point because it illustrates timberland’s ability to withstand economic downturns. Many farms did not withstand the great depression because the costs of agricultural production was too high, and the result was the abandonment of fields that would never again produce a crop. Likewise, as a city like Detroit can show you, homes and rental properties can only be vacant for so long before they are subject to hefty taxes, abandoned by the owners, and at risk of losing all their value. Timberland will just keep producing timber, giving you an even higher return when the market recovers.

The Risk of Timberland Over Time

With most assets, risks increase with time. Eventually all nations will fall, and all companies will fail. Disruptions in the timber industry are mostly just short term hiccups, and so the risk of timberland ownership falls over time. This isn’t just a pretty theory–it is reflected in reality. My first two jobs in the forest industry were working for two of the largest landowners in the country, and each had owned their land for over 100 years. Likewise, I have a 19th century survey map of one of my properties that names landowners in the area. I was not surprised to see that the last name of the largest landowner in town in 1858 is still the largest landowner in town in 2023.

When companies in the forest industry do fail, it is almost always due to activity in sawmills, paper mills, and logging, not ownership of the land itself.

Not All Timberland Is Equal

While overall, timberland is a great investment and addition to a diversified portfolio, not all parcels of timberland are created equal. The best timberland will be stocked with quality species with high quality stems and ideally be located close to a customer base, which in this case will be sawmills and pulp and paper mills. The nuances of timberland investment and selecting the best parcels is complex, but if you wish to learn more, we have a great 76-page guide that can introduce you to many of the core concepts of forestry and timberland investment. If you are interested in purchasing timberland as an investment, it is a must-read.