How to Value Timber Land in 2020

How to Value Timber Land in 2020

Timber is still a somewhat niche investment, so it’s not surprising that many land buyers may not be familiar with how to value timber land.

Yet, forested lands that are owned and operated for the sole purpose of investing is not new in concept.

It’s just that only recently has timber become an investment that is accessible to individuals as paper companies have been selling off large swarths of their timber land.

And it’s a great thing that this is happening, for timber land is a unique investment that allows you to own, enjoy, and profit off of it all at the same time.

But understanding how to value timber land when you’re going through the purchasing process is challenging.

We’ll do our best to talk you through the key components.

Although, understand that there’s no easy or straightforward answer.

Factors that impact your timber’s value

Think about the value of timber land like you would a home you wanted to buy or sell.

bulletWhat would factor into that valuation?

bulletWould it be the location of the home?

bulletThe materials that are used to build the home?

bulletThe size of the home?

bulletHow many bedrooms and bathrooms it had?

bulletThe neighborhood it was in or the school district nearby?

bulletWhat about amenities like the nearest grocery store?

bulletIf there was a house down the street that was half the price and had better features, wouldn’t it make you think twice?

Valuing timber land is similar.

You have to consider a wide variety of factors when you value timber land in order to get a holistic perspective.

When you first start looking at a property, take a moment to think about the features below and do a comparison with other parcels of timber land you may be considering.

bulletLocal market conditions:

State and regional prices can provide a starting point.

However, what your timber is worth is highly dependent on local market conditions.

For example, if your timber grows near numerous mills, it will likely command a higher price than if it is far from mills or close to only one or two.

Also, make sure that the nearby mills are able to process the type of wood that grows on the lot in question.

bulletSpecies, size, quality:

Not all timber land is created equal.

Certain types of timber (i.e. black cherry) are worth more than others (i.e. sweetgum).

Likewise, larger trees will be worth more than smaller trees.

Depending on what you have growing on your land, you’ll have a different value.

This comes down to species, size, and quality.

Just keep in mind that the value of many species fluctuates over time based on design trends.

So you will want to be sure you consult with something who is knowledgable on current hardwood prices.

bulletQuantity:

How much timber is sold in one timber sale?

Often, the larger the sale the higher the price per unit of wood.

This is because the greater the harvest, the less expensive it will be per tree.

And the more expensive it is per tree, the less a harvester may be willing to pay.

So, it makes sense to check the pool of local buyers and also consider how many trees you would be willing to harvest at once.

bulletConditions of the site:

The conditions of the site include the distance to the nearest road, the slope of the site, the soil wetness, and whether temporary bridges need to be built across streams.

All of these factors impact how expensive it is to remove the trees and haul them to a mill.

These operational costs of harvesting can impact what a buyer may be willing to pay to harvest timber on your land, and thus this can impact the value of timber land.

bulletLast time the property was logged:

If the property was heavily logged in the past few years, the timber on the land is going to be worth less.

This is because you will need to wait for some time before the majority of your trees are ready for harvest.

bulletState and local harvesting and management practices:

This component can impact what type of harvesting equipment is used, how close harvests can come to streams, and what contingencies must be made if there are local protected populations (animals/plants).

This can impact how much wood can be removed from your timber land and the operational cost of harvesting.

When you have high costs, you’ll have to offer lower prices.

So, based on the above, which do you think is more valuable?

bulletLarger pine logs used to manufacture top-quality grades of lumber in a region with multiple sawmills

bulletSmaller logs that are converted to woodchips to make pulp and paper products in a region with one sawmill

If you picked the first option, then you’d be correct!

Who can value timber land for me?

So, now you have the basic information about how your timber land is valued.

Unfortunately, you may not have the skills to actually determine the species of your timber land or what the conditions of the sites are.

You’re not the only land buyer or owner in this position.

If you’re searching “how to value timber land,” then you’re probably looking for someone who can value timber land on your behalf.

Here are some tactics to getting an actual figure to work with.

bulletStart with a free or low-cost service from your state or local university.

Call either a local state or university or your state service forester.

Your state service forester may work for the state Department of Natural Resources, Division of Forestry, or Forestry Commission.

The National Association of State Foresters may be of help to you in this process.

These free services can potentially connect you with a professional forester and the state’s free services.

If you can get someone to help you for free, then you’re in luck!

bulletContact a professional forestry consultant.

These individuals are experts in the field and can provide a wide variety of services for a fee.

They can give you advice on tree planting, forest management, and timber sale and supervision.

They can also help value timber land.

bulletGet a land appraisal.

While this isn’t as good as hiring a specific forestry consultant, timber is an area that the right land appraiser would have knowledge in.

In the report they create, they can tell you how much your timber land is worth.

How does an appraiser value timber?

The timber appraisal is the process by which your acreage is assessed and assigned value.

As with any other kinds of real estate, there isn’t just one method for appraising timber.

In our case, there are three primary methods used to value timber land.

bulletSales comparison approach:

This is the simplest approach to understand and also the most commonly used.

The value of the property is determined by comparing the value of similar properties that have been sold, are currently listed for sale, or are under contract.

The comparison ultimately yields an average market valuation that can be assigned to your property.

You can achieve accuracy by taking the average and then adjusting it by incorporating a number of other factors (unique site features, the date of each sale, the average volume of timber per acre, etc.).

bulletCost approach:

If there isn’t sufficient market activity in your area to use the sales comparison approach, the cost approach is an alternative.

This is the process of assigning value to each of the components on the property (including the timber as well as any other components) based on their replacement costs.

Once each of the components is given a value, the numbers are then added together to generate a final market valuation for the estate.

The cost approach is especially helpful for insurance purposes because each timber component is assigned its own value.

However, this approach is often only relevant if the trees were planted recently.

bulletIncome capitalization approach:

In this approach, an investor purchasing land understands that they’re paying for future revenue.

Thus, they’re looking to determine the amount any given property can reasonably be expected to generate in the future.

Income capitalization uses mathematical processes (such as cash flow analysis) to determine how much revenue the real estate has the capacity to generate.

Based on this future revenue generation, a present-day value will be assigned.

Why should you invest in timber land?

Timber land is a unique investment in that it has value as both an asset and a recreational resource.

Unlike other “physical” assets, like gold, timber land can be enjoyed purely for what it is.

You can ride on it, hunt on it, and explore it.

People invest in timber land because you can use it as recreational land and also sell what’s on it.

Additionally, timber land helps diversify your investment portfolio and reduces volatility.

It’s a hedge against inflation, which means data shows that timber land returns and inflation have a position correlation.

Timber land also moves counter-cyclically with other asset classes and provides overall portfolio diversification.

Finally, trees aren’t impacted by the economy.

They will continue to grow even in a changing market.

Furthermore, if timber prices are unfavorable, timber can also be stored on the stump (i.e. not harvested) and allowed to grow until the time is right.

And as the tree grows, it generally increases in value.

This isn’t the case for assets like stocks or gold.

How do you make money growing timber?  

Just as there are several ways to value timber land, there are also several ways timber land appreciates.

This includes land appreciation, real timber price increases, biological growth and forest product growth.

We’ll discuss each of these and how you can make money as a landowner.

bulletLand appreciation:

Land appreciation contributes only about 5 to 7 percent of the overall asset appreciation.

However, it may be more if the timber property is located in an area of high growth.

bulletReal timber price increases:

When different factors push the demand prices for certain types of timber up, this can help increase returns for this asset class.

For example, softwood – the primary product grown on U.S. timber lands – experienced higher demand and price increases after the housing market rebounded, exports to China increased, and the Canadian timber lands were devastated because of the mountain pine beetle1.

bulletBiological growth and forest product growth:

Money is made due to the biological growth of the trees and as a tree gets larger.

When the volume of a tree grows, it becomes more valuable.

How can you get started investing in timber?

Investing in timber land is a big purchase, and there are several ways to get started if you’re interested in this investment.

If you’re reading this blog, odds are you’ve already invested in timber land (or you’re considering it).

A quality timber land property is one that…

bulletIs located in an area with mills nearby that purchase the type of forest product being grown on your property.

bulletHave productive soils to grow the most profitable timber species

bulletCan be logged

bulletCan be purchased at a price that allows for a good rate of return

The method of investment that you choose depends on your total capital as well as your desired liquidity and management participation in the timber lands themselves.

If you do not have a large amount of capital, but you still want to invest in timber land, look into timber REITs (Real Estate Investment Trusts) and timber ETFs (Exchange Traded Funds).

Timber REITs and Timber ETFs are ways that you can purchase shares in timber-related publicly traded stock.

You don’t have to have a large amount of capital, and you maintain high liquidity with this investment.

Alternatively, you can also make an outright purchase of high value timber land.

This option offers more control, but you will ultimately have lower liquidity.

If you do purchase timber land, you’ll want to make sure you’re managing the land properly in order to generate the returns you are looking for.

A well-managed property will end up being more valuable in the long-term.

If you do not have personal experience managing a timber land property, reach out to local experts in the field.

You can contact the Association of Consulting Foresters of America as a starting place.

You can also hire a Timber Investment Management Organization (TIMO), which is what most institutional investors do.

TIMOs can purchase and manage timber lands on your behalf.

You can also do it entirely on your own or with the aid of a consulting forester.

Just make sure you are appropriately prepared if you choose this option.

Timber investors own parcels of all sizes, from 10 acres to a few thousand acres.

When you choose to handle the land yourself, it can be more difficult to take on a larger parcel of land.

Final thoughts

Understanding how to value timber land is key to making smart investment decisions.

If you’re looking to add this type of land to a whole portfolio of properties or even if this is just your first-time buying land, reach out to a professional forestry consultant who can help you do it right.

Each type of property comes with its own nuances and features, which can impact its value and appreciation.

Did we miss anything? Let us know in the comments.

For more information on buying, selling, or investing in vacant land, check out our other resources below.

We’re here to help throughout the entire land buying and selling process!

If you are looking to buy affordable land, you can check out our Listings page.

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If you are interested in land investing, you can check out our article on How to Get Started in Land Investing.

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And if you are looking to sell land, visit our page on how to Sell Your Land.

If you are looking for Free Land, check out our free land giveaway.

Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.

1 https://www.rliland.com/the-basics-of-timberland-investing/

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