InternationalLiving.com

Timber Investing 101

Timber is touted as one of the best investments of all time from a risk-reward point of view. I also like it, because, when you cut down the trees, you still own the land. Plant more trees, and you can continue your timber return. Regardless, though, you've always got the real earthly asset.

Some friends and I are in the process of buying a small piece of land in Panama planted with teak trees. The trees haven't been managed properly since planting, but someone who knows about these things has inspected them and thinks we'll be able to get a commercial harvest from at least half what's been planted. We made our offer accordingly.

In fact, though, we're buying mostly with an eye to the value that lies beneath the teak trunks. For, while the trees will provide some return on our investment, the real potential for profit is, we hope, in the land.

It seems a great situation to me: While we hold the land, waiting for property prices in the region to increase, the trees will continue to grow and become more valuable, as well. Double the chance to reap a return.

The thing to remember about investing in trees is that, like land, it's a long-term play. Depending on the type of tree (and I'm no expert), you're looking at a minimum of 10 years and at maybe as many as 25 years (for teak, for example) before you'll see your return. Given those time frames, it is possible that the land could become worth more than the timber harvest long before the trees mature.

You can invest in timber directly and indirectly.

You could, for example, buy shares in a timber company, either on the stock market or privately (I know some such private opportunities in Panama, for example). However, going this route, you don't end up with the land at the end of the day…the company does, and you lose the chance for land appreciation upside (for, not only do you not own the land, but you also don't see any gain from land appreciation in your stock value; timber companies are typically valued for cash flow, not land worth). On the other hand, this option is the most liquid (at least if you buy into a public company).

Another option is to buy trees from a tree farm. The farm management group takes care of the plantings and then sells the timber on your behalf. You don't own the land…and I'm not sure how you know which trees are yours. This may be the simplest way to invest in timber, but I'd say it's also the riskiest.

A third option would be to buy into a private forestry trust. With this kind of deal, you get the advantage of professional management, and land appreciation can add to your return. A friend in Argentina is putting together a forestry trust deal. Investors can buy shares of his trust that will include both the property and the timber. In addition, for his deal, you get title to so many residential lots being carved up on the land. This could make a lot of sense if, in addition to the timber play, you're interested in the idea of building a house in the mountains…

Finally, you could do what I'm doing--that is, buy a piece of land either already planted with trees or suitable for planting. Of course, going this route, you need to know something about growing trees for timber…or have a friend who knows something, as I do. In our case, we're planning to develop part of the land, as well.

In addition, I'm also looking at a much larger tract of land in Uruguay that also is already planted with trees. This buy would be more for the trees than for the future land appreciation or for the development potential, though I do expect the land to become worth more over the decade I'll hold it while the trees mature.

Your editor, watching the trees grow,

Lief Simon
For International Living

From the mailbag, in response to last week's Saturday Edition, "IL's Flip Answers Disgust Me!":

"I still contend that unless one has $500,000, minimum, to make the necessary foreign trips, hire the attorneys, visit the properties, and grease the right palms, forget it!"
- H.W.

"Dear Lief, I've been reading IL articles over the years…you must have said a hundred times: 'see the property for yourself, shop several agents, and retain a reputable local attorney.' I also think your complaining reader is a little naive about foreign residency. Getting permission to live in another country permanently is almost always a challenge. That's true everywhere, including the U.S. The bottom line is that I don't think you've misled your readers. In fact, you're usually pretty sober in assessing the prospects in different countries. So, don't take the complaint too hard. That's not the only opinion out here. And do keep talking about working and living overseas."
- B.S.

"I think what you have here is a reader who can't afford what he would like to purchase and is taking it out on you guys. I applaud you for even responding to this rather irate reader but you shouldn't have. I personally thank you for your valuable information on international areas to retire to."
- D.O.

"I've seen the $50,000 properties 'anyone can have'--no sane person would want them."
J.H.

"Good for you, Lief. Too many Americans travel the world with a 'better than thou' chip on their shoulder. We lived in France for two years and will retire there if not in Italy, but all too often we ran into the arrogance of my fellow Americans typified by 'if America hadn't saved you in World War II you'd be speaking German today' in the extreme, to 'all French people are rude, aren't they?' You've seen and heard this too I'm sure, and you just want to cover your face if there is a loud mouthed American like this in the bus with you."
- B.O.

"Lief, The person who wrote that letter/email isn't worthy of your response. I suggest canceling their subscription and ask them to never correspond with IL again."
- A.P.

"You can try and justify whatever you want…the way of life you advocate is only for wealthy, adventurous people…I will in no way be renewing my subscription, and am sorry I ever subscribed in the first place."
- C.H.

"I second your last comment to the writer--stay home PLEASE. Let's not export that 'attitude.' I continue to be amazed at how whiny and rude people have become. If the writer had just made the effort to ask for assistance from IL, or a name of a contact in-country, he or she could be having a totally different experience in property hunting (of course that assumes the writer has some common sense and doesn't expect to buy a $1M property for $100K)."
- L.F.

"I enjoyed reading your answer very much! My husband and I bought a 1/4 acre lot over looking the Pacific in Tambor in 2004 for $25,000. We have been offered $200,000 for it. The following year we bought a second, slightly smaller lot across the street which is now worth approx. $90,000. So while I'm talking 3 or 4 years ago, I believe the bargains are still out there. We are blue collar workers who had to take some money out of savings and borrow the rest, but what an investment we made! Before we retire, we will sell the second lot and use that money to build our house on the first lot. Investing and retiring overseas is definitely possible. You just need to do a little research first!"
- C.K.

"Dear IL, I just got back from Costa Rica 2 weeks ago and found that the prices were pretty reasonable. My suggestion to the man that wrote the letter to your wife is quit thinking like an American. I have found people that will owner finance and there is some in-country financing. I don't know how he missed the huge signs advertising gated community houses for $126,000 near the beach and that is where all the tourists go."
- P.P.