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Here is how I've got it figured in investing in timber land

Started by Rod, February 12, 2005, 08:02:15 PM

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Rod

I bought 292 ac of cut over timber land in 1997 for $45,000 and I've had a few timber companies offer me 145,000 for it now.I figue thats about 18% return on investment.Not bad I'd say.So if anyone is thinking about growing trees for and investment I would say its better the the stock market.So in another 7 years the timber and land should be worth about $456,000. :)

Tom

Yeah, or the trees worth 200 thousand and still keep the land.  ;D

Jeff

This is really sorta off the subject mark, but reminded me of this. My brother-in-law was telling me the woman he works with is closing on  a pruchase of over 1000 acres in the U.P.  How are they paying for it?  With the money received from the govenrment for NOT farming thier extensive amount of lower penninsula farm land. They quit farming it intentionally to put in a put-n-take pheasant ranch. They are still allowed to plant food plots and habitat.

That REALLY REALLY grinds me.
Just call me the midget doctor.
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WH_Conley

Rod, I was thinking on the same lines when I bought a cutover tract in 97. No way to do exact math til it is cut or sold, but enough margin that it will have to work. Course we had an ice storm two years ago that really worked on my IRA, oh well will still come out ahead.

How come I can't get paid to not farm my land? Don't really pay to farm it either. ;D
Bill

crtreedude

We invested in land in Costa Rica - and it has been going up in value about 10 to 15% per year - not counting the trees, etc.  We get an offer to buy our plantation about every few months so we seem to be doing something right.

It isn't exactly timberland - but reforestation so we are growing trees like a crop - which is a pretty long cycle - but working very well for us.

When a plantation tree fails, we then replace them with native species, creating a permanent forest that will be maintained to provide jobs and some residue for our families.  After we harvest the plantation trees, we will still have the natives remaining, and they will be big enough to provide food, shelter etc. for the animals. Also, a percentage will need to be harvested to stimulate new growth - and that will provide money for maintence, etc and some revenue.

We are also working at trying to secure all the land along a river for a corridor for wildlife and to protect the water in the area.

The government is very good about encouraging this as well as working with us. 

I read once that the investment funds in USA really like timberland because of many years, the standard return is about 14%. And that is not counting the increase in land value.

There are issues about investing in land in a foreign country that are not minimal - but we have really enjoyed the challenge. And the weather is wonderful.

Fred

So, how did I end up here anyway?

HORSELOGGER

I hear theres been a population explosion in Drury Missouri lately... Might be a good place to grab some real estate before the prices really take off :)
Heritage Horselogging & Lumber Co.
"Surgical removal of standing timber, Leaving a Heritage of timber for tommorow. "

SwampDonkey

You'de pretty much have to live in an area where the economy would allow those prices. If you bought a 300 acre parcel in this kneck of the woods for $45,000 you'de never get 100,000 in 10 years, be lucky to get $60,000, which isn't bad, but the $45,000 invested will bring higher returns. There have been alot of speculators trying to follow the same path as you describe and end up losing money. It all depends on location and how much demand there is on buying up land. Most land here gets eatin up by large companies or other farmers exanding their acreage who aquire it from bankruptcies, unpaid taxes, and pensioners that have to sell the land to pay the province for nursing home care. In the latter case the land usually goes real cheap.
"No amount of belief makes something a fact." James Randi

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2020 Polaris Ranger 570 to forward firewood, Husqvarna 555 XT Pro, Stihl FS560 clearing saw and continuously thinning my ground, on the side. Grow them trees. (((o)))

Bro. Noble

Horselogger,

I'd be real dubious about doing any business with some of those more recent Drury inhabitants ;)
milking and logging and sawing and milking

Buzz-sawyer

Johnny come latelies do pour in Drury .......NEWS AT 11:00)) (10:00 central)
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J_T

Just my luck Buzz and I had my sack packed just been looking for a stick put it on over my shoulder ;D :D :D
Jim Holloway

Buzz-sawyer

    HEAR THAT BLADE SING!

Rod

Here is a study on tumpage prices here in West Virginia in region 2 from 1989 -2004 http://www.wvforestry.com/Stumpage%20Prices.PDF.It says that in 1989 stumpage avrage price was $97 and in 2003 it was $259. I have a lot of yellow poplar and in 89 it was selling for $53,and in 2003 it was going for $161.White Oak goes for about the same price as poplar.Ash $158.Poplar grows fast.They take cucumber-trees around here and sale them as poplar.If you haul 18' poplars over to the veneer plant they pay $400M 8'' MIN inside the bark nd 30'' max.


Furby

Rod,
I really think ya need to add inflation into your figures. It don't do much good to compare those prices otherwise.

Rod

true,I didn't add in inflation but neither does anyones 401k plan add in inflation..I'd say most retirment plans are down for the last 5 years so if you added in inflation on those retrimenet accounts they would really look bad... >:( :)

Rod

Oh,maybe you mean add inflation in on the timber price..Well the timber price alone has averaged 25% returen from 1989-2004 in my region and  inflation has been about 3% per year in the US over the last 5 years so its net 22%.

Furby

Not sure what I meant now. ::)

$97 was a lot more in 1989 then now, don't matter what your talking about.
Sure stumpage price has gone up since 1989, right along with everything else, including cost of living.
Maybe I'm just looking at it the wrong way.

crtreedude

Rod, are you saying that timber price went up 25% PER YEAR between 1989-2004 ?  If it was over the whole time, and inflation was 3% per year over that time , then the inflation was 45% compared to a growth in price of 25% - which means you moved backwards in price roughly 20%.

The numbers are slightly different because I did a very simple calculation.

Fred
So, how did I end up here anyway?

Rod


Rod

Furby ,I'd guess the price of my 1997 truck is down from the price I paid for it in 97   :) :)

Rod

Tom,I thought about that but I would have to pay 33% capital gains

Jebff B,thats our goverment tax dollars at work :D :D

crtreedude

A touch too simple - and perhaps we are getting into to things beyond my expertese, but I think this is how you figure it - it isn't exactly 45%, because the value of the money drops every year. If you say that prices increased 25% between 1989 to 2004, then you have to figure the inflation over the same time period, or you are acting like there was no inflation between 1989-1999 - or ten years.

       True Value        Yearly 3% Inflation Loss
1989   $10,000.00     $300.00
1990   $9,700.00   $291.00
1991   $9,409.00   $282.27
1992   $9,126.73   $273.80
1993   $8,852.93   $265.59
1994   $8,587.34   $257.62
1995   $8,329.72   $249.89
1996   $8,079.83   $242.39
1997   $7,837.43   $235.12
1998   $7,602.31   $228.07
1998   $7,374.24   $221.23
1999   $7,153.01   $214.59
2000   $6,938.42   $208.15
2001   $6,730.27   $201.91
2002   $6,528.36   $195.85
2003   $6,332.51   $189.98
2004   $6,142.54   $184.28


Value of 10,000 at 1989 valuation at the year 2004   $6,142.54   
25% increase in value of wood during the same time    $7,678.17    ( = 6,142.54 * 1.25)
Change in dollars, adjusted for inflation                    -$2,321.83   LOSS (10,000 - $7,678.17)

Unless the yearly increase in lumber is keeping up with inflation, you are falling behind - of course, this does not reflect the growth of the timber - that makes the calculation a little harder. However, you can figure your cubic meter per acre growth rate (pretty well known) and apply that to your number. These numbers don't reflect things like taxes, expenses, whether the money you are using is a loan (i.e. interest) or money you could have invested in something else. (Since bonds run at about 6% over the long haul, you figure that as a good baseline)

On the positive side, you can add in the increase in land value - if it is increasing in that area.

So, how did I end up here anyway?

Rod

OK Fred,now in 1997 when I bought the place it had no saw logs on it and in 2004 it has at lest 600,000 feet of saw logs 16'' DBH.now maybe that might make a difference in your  figures.The taxes are $332 a year,expenses are $0.And Bonds  you have to have cash for those.I got a loan for the whole amount at about 5%.So their are some figures to figure in.Also the place came with a gas well and you can have free gas for the home but I don't think I would count that in tho.
So what your saying is even if you have Bonds at 6% your still coming out in the hole? :D






crtreedude

Nope, you probably are doing fine, but you would have to look at the numbers.

1. How much will you get for those saw logs?
2. How much will the remove of those logs drop the value of the land from the original purchase price?
3. You net loss per year would have been 8% on your money you borrowed (loan amount + inflation), how did land value increase compare? You would use your loan amount instead of the bond amount.
4. Unless you were using the gas, you wouldn't count it - but if you were... Then by all means count it.
5. If you really want to get accurate - you have to figure the amount of the principle that you have paid over the years as tied up money - so that you should figure at 6% -  unless you have a banker I want to talk to, you have been paying on the principle all the time, so that money needs to be reflected. It is probably easier just to apply 5.5 to the whole purchase price of the land, every year, as though you were only paying that in interest.

If the saw logs are now worth X, what was their value when you bought the land? I rather doubt they were seedlings. Was that reflected in the price of the land, or did you get them for "free" because the previous owner was not aware of their current value? Even though a tree is not harvestable yet, it still have significant value because of the growth. Anyone who disagrees, I will buy an option on any oak you have that is 15" in diameter... :-)

I told you it gets complicated.... ;-)  According to what I have read, the big funds figure an average return - over many years - of about 14% per year.  This is better than what you can expect in the stockmarket, bonds, etc over the same period of time.  It is also considered a pretty low risk investment, inspite of things like forest fires, plagues, etc.

I wish my expenses were 0 per year! Of course I have a plantation, not timberland.

I may sound like I am critical but I am not (I hope). It is just how I work on business plans. I try to figure out EVERYTHING that cuts into my profit and try to convince myself that it is a bad idea. If, after a few months, I can't kick any holes in it anymore - I go ahead and invest. No rose colored glasses when it comes to investing my money! 

If you don't figure in all the expenses, you can be in a situation where you work for 15+ years at something, and at the end you would have been better off working at McDonalds.

Fred

So, how did I end up here anyway?

Rod

Fred,my loan is for 15 years with paments of $357 a month.Saw logs on the stumpage average is about $250M,and cut over land when I bought the place was $150 ac,and now I see their asking $600 ac but I don't know if thats what their getting tho.Cut over timer land around here is when you can't walk though the woods because of all the tree tops and weeds,and nothing but about 8'' -12''trees every were.

So wereare these big funds with average return from 1997 to 2004 with 14% per year?

I did buy a bandmill for $3400 that has and eletric motor and I can't tell much differents in my eletric bill with it.I cut out the Hemlocks that aren't worth much ($30 a ton) around here and I used them in 2 homes which I sold 1 of the homes for $50,000 and I had & 25000 in it not counting the mill price and I didn't have to pay the 6% sales tax on my lumber from lowe's either.



And you said Bonds,ok,so I thought I'd check that out and here is a 35 year study on Bonds http://www.ncpa.org/pub/st/st244/s244b.html

Stock and Bond Returns, 1872-2000 The average for all 35-year periods was 5.1 percent.

In addition, all-stock portfolios almost always outperformed mixed portfolios containing both stocks and bonds.
Furthermore, the performance of the capital markets is much better than what the young today can expect on their Social Security payroll tax dollars.

The average annual real rate of return for an all-stock portfolio was 6.4 percent over the 95 periods, with the lowest being 2.7 percent for the period ending in 1921.
A portfolio of 60 percent stocks and 40 percent bonds produced an average annual real rate of return of 5.1 percent, with the lowest being 2.0 percent for the period ending in 1920.
By contrast, virtually all young people entering the labor market can expect a rate of return on their Social Security taxes of less than 2 percent.


Thats OK with me Fred,about being critical about stuff.I do it all the time ;D,Another ting,I've owned this land for 7 years and I have yet TO see any of the owners around me come to see their timber land.Maybe they look at their land with one of those new pictures they get from thoses satellites


crtreedude

Therefore, it looks like you are doing really well - nevermind the enjoyment of the land itself.

No funds have been doing 14% per year for the long haul - you better figure 10%

Looks like you are right on Bonds, I tend to figure expenses high, profit low. Then I can be pleasantly surprised - I don't like the other kind.

Currently I have nothing in the stock market - I consider it still too high and unstable. When buying stock, I look at the price, the shares and the earnings and decide if I would like to purchase the company. Do I like their management, prospects, etc. In my opinion, this buying stocks because you hope someone will someday buy it for more is crazy - it sounds like one big pyramid scheme to me.

Fred
So, how did I end up here anyway?

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