Money Does Grow on Trees
What if your bank account was growing at 10% per year for 8-years, and it grew from $100,000 to $200,000 from interest, then Boom! …it tripled in value! …your $200,000 turned into $600,000? Then your account continued to grow at 10% for another 8-years, and it grew from $600,000 to $1,200,000 from interest, then Boom! …this time it doubled! Your $1,200,000 turned into $2,400,000? $100k to $2.4 million, in 16-years? Wow, how did that happen?
This is an example of what continues to happen for some timberland investors far off Wall Street. And all they’re doing is buying and selling timber at the right stage. Investment Grade Timber While the Wall Street, Timber Investment Management Organizations (TIMOs) promote buying a forest that consists of all three stages; Brown Land & Timber Company promotes the acquisition of timber at the beginning of the Growth Stage, and disposition at the beginning of the Mature Stage. You can see from the “Timber Changes Class” chart, the average price of timber tripled in value over the last 10-years as it grew from pulpwood into chip-n-saw. And when chip-n-saw grew into lumber, …the value doubled! Because timber grows through any market, a timber investor can avoid much of the market risk associated with stocks, bonds and mutual funds.
Look at the above chart and notice what happened to the timber owner when he bought pulpwood in June Protected content sold it as chip-n-saw in June Protected content . The market for 2x4s (chip-n-saw) went down over 40% from 10-years earlier. This was a dramatic dip in C-N-S price due to housing and mortgage problems. However, every investor who bought pulpwood in Protected content sold it as chip-n-saw in Protected content a doubling in volume from “growth” AND almost a tripling in value from “change in class” …BOOM! A timberland investment is actually two investments. An investment in timber, and an investment in land. Let’s take a look at timber first. The major tool for evaluating timber, or land, is the Accretion Rate. This is comparable to the Capitalization Rate used to evaluate commercial real estate. In order to get the data you need to calculate the Accretion Rate, it is necessary to order a Timber Report from a qualified Registered Forester.
The Forester should not be in the real estate business. This will avoid a potential conflict of interest. The Timber Report assignment should include instructions for the Forester to use actual tree measurements to calculate the growth rates and projections. It should also include instructions to use volume tables and growth charts from the US Forest Service. Finally, calculations for future values should be based on published price information from a reputable pricing agency like Timber Mart-South, and should contain 8-year and 16-year projections, in tons and dollars. Once you have this report, you will have all the information necessary to calculate the Accretion Rate.
The actual calculation is done by subtracting the beginning value from the ending value, dividing the difference by the beginning value, then multiplying by Protected content convert it to percent, and finally dividing by the number of years. This will give you the projected annual increase in value – Accretion Rate. The Accretion Rate should always be 25% per year, or more, for Investment Grade Timber. Next, a land appraisal will need to be ordered from a Registered Appraiser who is not in the real estate business. He should not know the sale price. His assignment should include using the most recent, and most comparable sales according to access, utilities, topography and soil.
As with the forester, the appraiser should not be in the real estate business in order to avoid a potential conflict of interest. Use the most recent 10-year average land value published by the USDA to calculate your projections. This average value is determined by looking up the price of land 10-years ago, and now. Then using the calculation above to determine the average annual increase. This increase in value is the Accretion Rate. When evaluating a land acquisition, give careful consideration to the opportunity for appreciation. Land, like timber, changes in class. We all know the value of land will go up as the class changes. For example, the best commercial sites in Little Rock, Arkansas are selling for 7-times more per acre than the best residential sites! Generally speaking, the first class of land is Timberland, which is land used only to grow timber.
Then, someone decides they would like to use this land for something in addition to growing trees. Perhaps, hunting, 4-wheeling, horseback ridding or bird watching. Now this timberland changes into the second class of land, which is recreational land; and it becomes more valuable. As urban sprawl expands into the countryside, the third class of land emerges. Now, there is a need for housing, and the place to build those houses is classified as Residential land. Then, as communities grow, the need for services like grocery stores, gas stations and restaurants create the need for Commercial land; the forth major class of real estate.
Here is the criterion that makes ordinary land …Investment Grade land, and will give an investor the best opportunity for a change in class. Good Access is paramount. A prudent investor will know how important it will be to a future buyer to have a desirable way to get to and from his land. Available Utilities with electricity and water certainly determine the possibility for a change in class. Buildability is a word I came up with to describe land that has 70% of its surface suitable for building a house. Growability is another word I came up with to classify soil, which will grow timber at 10%, or more, per year. Timberland and Agricultural land are very similar in value, and they appreciate identically. According to the United States Department of Agriculture Bureau of Statistics, the average price of land in Arkansas went up from $1,030 per acre in Protected content $1,820 per acre in Protected content .
This is a total average annual increase in value of 7.70% per year, the current Accretion rate for Arkansas land. This increase looks pretty good when you compare it to the stock market and mutual funds. During this same period, the Dow went from 8,944 to 11,346, an average annual increase of 2.69% per year, while the S&P went from 1,133 to 1,278, and came in third at 1.28%. Finally, determine the Accretion Rate for the land and timber. Simply use the beginning values (cost) and the ending projected values, to calculate the average annual Accretion Rate. The Accretion Rate for an Investment Grade timberland offering should be a minimum of 15%. Follow these suggestions for evaluating a timberland investment, and the next 10-years may be as good to you as the last 10-years has been to the wise and informed timberland investor. So sit back, relax, and let nature grow money on your trees!