Questions regarding investments

[Paragonrex]

Hi Everyone,

New here, and grateful to be accepted onto the board.

Now for my noob questions lol.

I have recently been illuminated as to the potential profit that can be had in investing into timber land.

I know a local (to me) timber company that is offering investing in their firm for monthly returns of some impressive dividends.

My question is:  How exactly does this whole investing process work.

I give them my money and they do what with it?  Spend it on leasing land? Buying land?  Where does the profit come from?

Is it in the land resale or the timber sales?  What is the potential risk involved?

Every article that I  have read says that Timber investment is high yield low risk.  Is this true?

Any enlightenment that the learned members here can offer me is much appreciated.

[Southside]

Welcome to the Forum.  High yield / low risk?  Ok, does that come with a guarantee too?  Many people, corporations, and pension funds have made a lot of money in timber investments.  Many people, corporations, and pension funds have lost a lot of money in timber investments.  @Wudman might be able to shed some more light on the whole thing.  

[mike_belben]

This is right up @nativewolf 's alley

[WDH]

Timber Investment Management Organizations, called TIMO's for short, buy land with investor's money, many times retirement fund money, and the asset has a starting market value, the value of the timber and the land.  Over time, the timber grows and the asset increases in value due to timber growth and sometimes in timber value as timber prices improve (or not) and in appreciation of the land value (depending on where the land is and whether the area is showing development, i.e. homes/subdivisions being built, economic development in the area, etc).  They cut timber and re-invest in reforestation, managing the timber asset to increase the asset value.  The timber asset is managed to maximize its value, now and in the future.  Sometimes they sell off higher value parcels of the land for development or other higher and better uses (called HBU) and re-invest that money in additional land and timber.  At any point in time, the asset, the timber and the land, has a market value.  Kind of like a mutual fund having an asset value at the end of the day. 

Then there is private investment where an individual like me or you strike out on there own and buy timberland as a portfolio asset that you or I manage as we see fit, hoping that the timber and land increase in value as time goes by.  It generally does, but there are risks such as insects, disease, weather (hurricanes, tornadoes, etc).  The timber markets move up and down with the economy, and land value may decrease as in an economic downturn, be stagnant or it might appreciate. 

[nativewolf]

Welcome to the forum. It would help to let us know your location. @WDH reply pretty much sums up the modern timber investment vehicle, the TIMO.  They are usually classified as REITs and as such they are governed by the rules/norms of other REITs.  If it is a different corporate form (C corp, etc) then you need to do due diligence and in all cases ask for a prospectus.  If a company is soliciting investments (this is generic, there are exceptions and this is for the US-not sure about canada or other countries) they will need to either do so as a publicly traded entity (will have stock on some exchange nasdaq, nyse, etc) or they are limited to 200 qualified investors plus friends and family.  In all cases there is a prospectus and published financials.  If they don't have a prospectus and are soliciting investments steer clear.  It is a sign of either immaturity or less than honorable people.  Look at past history of management, if they have bankrupted a company before steer clear.  If they have a history of plants burning down...steer clear.  There is a well known sawmill in WV whose owner has had 3 plants prior (2 of those burned to the ground), he's just sold out again this winter, if he's selling only a fool is buying.

There have been periods of time when timberland investments made a lot of sense, in particular before the newspaper business died.  The loss of pulp mill contracts have ruined many investment models as they were based on just producing wood fiber.  Investors still make money but I view that as an increasingly risky event for pine timberland owners that don't have access to very competitive pulpwood market (in the US this is primarily SE US and NW timberbelt of OR and WA coastal ranges).  Hardwood markets can be a different animal.  In areas close to @wdh homebase in georgia there is a very active softwood market and foresters are practicing some of the most advanced fiber production practices in the world.  Other hot spots include coastal OR, maybe the most productive site for fiber in the world.  

The advantage that timberland has versus some other assets like oil & gas is that you can time market highs and lows, if you let a pine plantation sit a year or to to avoid a dip in prices you can usually do well in a recovering market some time later.  This might throw off returns a bit but is possible.  Sometimes TIMOs can't sit out and instead of decreasing harvesting in periods of bad pricing they have to accelerate harvest in order to meet promised dividend yields.  This does terrible things to the forest ecosystems and in the long run to the community that depends upon proper modern forest management practices.  A modern TIMO is going to sell everything it can off a forest including hunting leases, conservation assets (like getting paid not to cut along streams to improve water quality), pulp, sawtimber, etc.

There are some timberland reits that are a bit different, more conservation oriented and I'm a fan of those entities.  

[mike_belben]

Thank you guys for the great responses.  Very useful to me as well. 

I am still hoping to get my ducks in a row for land management someday.  Everyone is turning stands to pulp, i want to grow them back to veneer.    My foray into trucking and quarrying introduced me to some big corporate acreage overseers.  

The next few years is the challenge of making trash culls profitable enough to do without billing the landowner for it.  My backyard test forest has responded incredibly to TSI. 

[Wudman]

I'll add my two cents to the mix.  The vehicle that you are referring to is a REIT (Real Estate Investment Trust) as pointed out above.  Another vehicle that is used is a Group Annuity Contract (mostly used by larger pension funds etc.).  A third party actually has title to the property and insulates the investor to some degree. 

Timberland investment is generally viewed as a lower risk - safer return investment.  In the Southern U.S.  that equates to something in the neighborhood of 8% nominal return........5-6% real over the life of the investment.  Today, those returns are sub 2% in the short term as markets have been on a roller coaster.  If you were in on the west coast during the shutdown of the National Forests in the late 80's......you achieved triple digit returns for a while.

The good thing about timberland is that your investment is growing regardless of the market.  Biological growth (pine plantation) in the southeast is going to be in the neighborhood of 8% to the northern range to 12-15% down south.  This is trees putting on volume.  Additional value is added as product mix converts from pulpwood to chip and saw (small sawlogs) to larger sawtimber.  Higher value products such as transmission poles can be pulled from the mix as well.  Land appreciation as well as selling parcels for higher and better use add to the return.

Most commercial timberland is also leased for recreational purposes (hunting leases).  This generates additional revenue.  Other potential revenue streams include carbon credits, wetland credits, bee (honey) leases, etc.

The downside, if you are a small investor, a hurricane, wildfire, or other natural disaster can wipe you out.  A single mill can shut down and you can lose your market.  The larger investor minimizes this risk by geographical diversification. 

Many of the Canadian companies are venturing to the southern U.S. as conditions change there. 

Climate change is always in the news.  For pine production in the southern U.S, this is generally good news.  Global warming for the south means warmer, wetter, and more CO2.  What does a pine need to grow........warm, wet, and CO2. 

Also, the worldwide population continues to grow.  It is expected to double in the next 50 years.  Have you checked the toilet paper isle in your local store the last month?.........somebody has to supply it.

The family of one of my college professor's was in the sawmill business in Alabama.  He had amassed a huge land portfolio.  His quote was "All I want is the acre that joins me".  You can't go wrong buying land.  They don't make it anymore.

Wudman

[runmca]

Does anyone have experience with using a self-directed IRA to purchase timberland? Once you reach 59 1/2, can you potentially take ownership of the land yourself?

[WDH]

The title to the property will be listed on the deed to the Custodian of the IRA.  For example if the IRA is owned by John Smith and the Custodian is United Bank, the deed will show the name on the deed as: United Bank, Custodian for John Smith IRA.  The property is owned by the IRA and is subject to all the rules for IRA's.  The title only passes to the owner when he/she takes the distribution from the IRA and then pays the taxes that are due as with any distribution from an IRA.   

[mike_belben]

When someone invests in REITs or TIMOs... How are they realizing the return?  Are they buying shares in a management portfolio that they must sell .. Or receiving a periodic dividend based in number of shares?  Or just a promise of X% return on the dollar amount they consign to them?  

How does the nitty gritty work?  Especially if the TIMO goes bankrupt or gets charged with some form of corruption.. What right does the individual investor have to the real property they are parking their money in, if any?

[runmca]

The title to the property will be listed on the deed to the Custodian of the IRA.  For example if the IRA is owned by John Smith and the Custodian is United Bank, the deed will show the name on the deed as: United Bank, Custodian for John Smith IRA.  The property is owned by the IRA and is subject to all the rules for IRA's.  The title only passes to the owner when he/she takes the distribution from the IRA and then pays the taxes that are due as with any distribution from an IRA.  

Thank you for the clarification, much appreciated!

[WDH]

Weyerhaeuser, a REIT, is traded on the NYSE as a stock.  It is a company that directly owns timberland and Many timber REITs usually own some mills as well, although the amount of the earnings that can come from manufacturing is limited.  Companies organize as REITs for tax purposes.  As a stockholder, you own a tiny little portion of the company and can vote on important actions by Proxy vote just as in any other kind of stock.  The stock price on any give day can fluctuate and your investment can gain or lose over time.  Most timber REITs pay dividends to the shareholders.  

In the case of a TIMO, it is a management company being compensated for managing the timberland asset by the owner of the portfolio, in many cases a pension fund, insurance company, Endowments, Foundations or Institutional investors.  The TIMO does not actually own the assets, just manages them.  A large individual investor could buy a sizeable amount of timberland and contract with a TIMO to manage the asset.  Or, hire a managment consultant, companies that specialize in managing someone else's land.  

[Paragonrex]

Wow,

Thanks guys, these replies are very informational and helpful.

Still have a couple of things I could use some guidance on.

I am here in the Pacific Northwest, Washington specifically.

I am talking with a timber investment company here and they say they offer investment, but I have not talked with them on the specifics.

So I will tell you what they have told me to date, and what I think may be going and you guys can correct me if I am wrong.

So their website says," Multiple Real Estate Contracts are available for purchase. The #*$&&@(!@ Company offers guaranteed future income with investment paying annual returns of 6 to 7%. With over 1.9 million in real estate contract balances available for purchase, the income possibilities are endless.

Real estate has always been a solid investment no matter what the economy is doing. Currently, the 6.667% average rate of return on these contracts as a whole provides more than $16,000 in monthly income and roughly $146,000 in annual interest returns."

Some of you who are Timber veterans may knew who this company is based on the quote, but I withheld the name out of respect.

So this is company I am looking at doing business with, does this quote seem right?

How exactly does this business model work?

Do these returns seem legit?

Your help is so very appreciated in this matter.

[Southside]

If my math is right, just going off the top of my head, then you are looking to invest over $2 million to get the numbers they are saying?

[mike_belben]

Look up Clark S. Binkley.  

[Paragonrex]

If my math is right, just going off the top of my head, then you are looking to invest over $2 million to get the numbers they are saying?

Yikes,
Is that the kind of money I need to invest?

I think that may be a little out of my ballpark.

But I am getting the impression that what they are claiming is within the realm of the possible then?

[Southside]

Real estate has always been a solid investment no matter what the economy is doing. Currently, the 6.667% average rate of return on these contracts as a whole provides more than $16,000 in monthly income and roughly $146,000 in annual interest returns."

Well, I don't know.  When I read this at first I was thinking they were telling you your return would be $146K annually @ 6.667% rate of return, which would be about $2 million in principal.  Now if their entire company is generating that on an annual basis, then they are not very large.  So, not sure what to think of what they are saying.   

[mike_belben]

In my opinion, the only way to GUARANTEE a fairly high level of return at a market high during economic and civil crisis, is a ponzi scheme.  

The federal reserve is at .25% and the prime rate is 3.25% with all sorts of stuff going bankrupt.  

Food for thought. 

[nativewolf]

Real estate has always been a solid investment no matter what the economy is doing. Currently, the 6.667% average rate of return on these contracts as a whole provides more than $16,000 in monthly income and roughly $146,000 in annual interest returns."

Well, I don't know.  When I read this at first I was thinking they were telling you your return would be $146K annually @ 6.667% rate of return, which would be about $2 million in principal.  Now if their entire company is generating that on an annual basis, then they are not very large.  So, not sure what to think of what they are saying.  

Thought the same thing myself re the size of the company.  In this case I would very much want to see the prospectus.  Also, to solicit funds is a regulated activity.   They will need proof that you are a qualified investor or they must be publicly traded.
As @wudman says the returns are going to be sub 2% in very recent timeframe and frankly it could get worse.  Realestate has often been a bad investment, so that statement is misleading at best and a lie at worse.  Just look at anyone buying in the 2000-2007 bubble.  In my area the land values for raw land are the same as in 2005, 15 years later.  From 2000-2020 the stock market has risen roughly 300%.  Like anything else that is an investment is volatile and average returns are less impressive but proves the point.  Diversify your investments and buy dips.  Today might be a dip in timberland pricing, certainly the real-estate market stopped cold this spring.  You'd want to see the dip reflected in the price of the offering.  
@Skeans1 and others in the PNW might have much more direct insight into the parties involved and I would not be shy about asking.  "$146,000 in annual interest returns" is a phrasing that bothers me, maybe that is a typical REIT description of income from rents but I would think it should just be "returns".

[nativewolf]

In my opinion, the only way to GUARANTEE a fairly high level of return at a market high during economic and civil crisis, is a ponzi scheme.  

The federal reserve is at .25% and the prime rate is 3.25% with all sorts of stuff going bankrupt.  

Food for thought.

Yep for a TIMO to "guarantee" this would mean vastly accelerated harvesting.  Some of the early TIMOs did just that.  

[longtime lurker]

While the underlying land tends to be relatively low risk and stable both wood products and logs are commodities and subject to price fluctuations. As soon as someone starts spruiking guaranteed returns with any commodity I get very sceptical.

No offence meant to anyone but all the advice given above is general... What you need is advice that is specific to this offer and your situation. Find a good fiduciary analyst, if you aren't sure I can recommend a couple of firms on the west coast my ex used to consult for who can do the due diligence etc.

Investing in private REIT's is normally best left to sophisticated investors who understand the risks and have enough diversified investments to minimise them, or can afford professionals who do. What you need to remember is that this is not about timberland, it's about an investment vehicle. The timberland is just the what... It's the how that matters.

[larry12]

Those returns sound great today ! I watch the stock markets daily , and they have been soaring lately in some areas , but are still facing some hard days ahead ( in my opinion ) .I personally would purchase a good woodlot like I did in 2015 and watch it grow . You can't loose on real estate in the long term . My lot was clear cut in the 1940's and is growing perfect with 90% hard maple . Taxes are cheap , and I can already make a profit if I list it.