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Diversifying your investment portfolio is a good way to hedge your bets during inflation and keep making your money work for you. For example, you might consider investing in timberland. This type of investment involves land that produces timber, and may be owned by individuals, universities, charitable trusts, pension funds, and more.
Best of all, you don’t have to buy your own parcel of land: there are multiple ways to invest in timberland.
How does timberland generate a profit?
Because trees take a long time to grow and mature, timberland investment is usually a long-term investment. There are three major ways timberland generates a profit. First, the trees themselves will grow, increasing in size, weight, and density. The more mature the trees, the more valuable they are. Older, larger trees produce more lumber and can also be used for larger projects.
Profit is also generated when the land appreciates in value. Sometimes, when the price of land has risen significantly, landowners harvest the timber and sell it to developers for another project.
Finally, lumber price appreciation can generate profits. For example, as housing demand increases, the demand for lumber grows, too.
Why would you invest in timberland?
As you may recall from the worst of the COVID-19 pandemic, the demand for wood and lumber products is high. When supplies are cut off, like during the pandemic, the price of lumber and wood products soars.
Typically, however, timberland investments appreciate over the long term, and aren’t linked to stock and bonds markets, which affect the cost of real estate or other goods and services. This makes them a smart, inflation-resistant investment for investors of all types.
Best ways to invest in timberland
Here are a few different ways you can invest in timberland, whether you’re an individual investor or part of a larger investment operation.
Crowdfunding is a popular way to raise money for projects, products, and services—but it’s also used to fund timberland investments. Like ETFs and REITs, the crowdfunded investment may be for a single piece of forested land, or combine different investments to spread out the risk. Investors can buy in to the investment, then receive proportional profits when the land starts generating income. Look for well-established investment firms or reputable timberland companies if you go this route.
West Coast U.S. Farmland
Access to a secondary market
South American Farmland
Open to non-accredited investors
The simplest and often most lucrative way to invest in timberland is to buy a piece of forested land. These parcels are often less expensive than developed land of a similar size. Direct investments allow you significantly more control over your land.
Once you’ve decided to harvest the timber, you can either replant new trees, develop the land, or sell it to someone else. This works especially well if your timberland is located near a populated area.
One major drawback to directly investing in timberland is financing your purchase. Whereas banks and other financial institutions provide mortgages for developed land, they typically do not extend the same loans to timberland investors. This means that you’ll need to have cash available to purchase without a loan. Most individual investors cannot afford this, making it a high barrier to entry.
It’s also important to remember that you’ll need to hire a timberland management organization, who can farm, harvest, and process your lumber products.
One popular way to invest in timberland is through a timber exchange-traded fund (ETF). Timber ETFs are made up of companies who either own forestland or produce wood and lumber-related products.
When you purchase timberland through an ETF, you’re purchasing a share in the timberland owned and managed by the fund. Some ETFs center entirely around timberland, while others may invest in a more diverse selection of natural resources and land. The benefit to investing in an ETF is that you won’t have to manage the land or bear the brunt of the costs yourself. As long as you can afford the minimum share, you’re on your way to a diversified investment portfolio.
Real estate investment trust
Real estate investment trusts (REITs) are similar to ETFs. Again, rather than directly investing in timberland yourself, you purchase shares of the greater fund. The REIT company manages the land, whether that’s exclusively timberland or a combination of other real estate investment assets.
REITs and ETFs are good choices for less experienced investors, or people who don’t want to invest their own time into managing the land. This hands-off investment type allows you to simply invest money and collect dividends over time.
What companies let you invest in timberland?
There are plenty of companies who own and manage timberland. For example, Weyerhaeuser Company is an REIT that invests in timberland and forestland. They harvest the wood and create, sell and distribute the lumber products. This company is one of the largest owners of forestland in the world, and allows investors to purchase shares.
Similarly, Guggenheim Timber is an ETF consisting of over 20 different lumber and timber companies. They typically produce dividends of 3 percent or more each year. These famous examples are just two of the investment opportunities you can take advantage of as an individual investor.
Drawbacks to timberland investment
If you’re interested in investing in timberland, it’s important to understand the drawbacks just as much as the advantages. While investing in timberland and forest products can be an easy, hands-off way to generate income, it still carries a certain amount of risk.
First, although the demand for lumber and timber products remains fairly steady, the lumber and land itself is vulnerable to natural disasters. For example, consider the wildfires that destroy West Coast forested areas on a yearly basis. There’s no guarantee that your investment will not suffer the same fate. Other natural disasters, including storms, mudslides, and pest infestations, can also wreak havoc on forested land.
Second, although timberland profits are usually not linked to the stocks and bonds market, the land and product value can still be affected. For instance, demand for lumber may fall during a recession. This can lead to lumber prices falling.
Finally, when the housing and construction market suffers a loss, the demand for lumber often drops. This causes prices to fall, and may affect how much profit your investment will return.
Should you invest in timberland?
If you’re thinking about investing in timberland, make sure to do your research. While timberland investments can often be recession-proof, that doesn’t mean that every REIT, ETF, crowdfunded investment, or even direct investment will pay off right away. Timberland is generally not suitable for immediate high-yield returns. Remember, if you directly invest in a parcel of land, you’ll need to factor in management, harvest, and production costs.
However, if you’re interested in steady, respectable profits over the long term, timberland investing could be right for you. Most casual investors will get the best results from REITs or ETFs, which allow you to collect dividends without having to manage the funds yourself. Ultimately, investing in timberland is a great way to diversify your portfolio—as long as you understand the potential risks and rewards.