Life+LAND blog post by Danielle Atkins
Let's talk money...
What is the return on timber?
We're talking money.
What can you expect to get in 20-25-30 years . . .
Well, literally no one can tell you the exact dollar figure (and if they do - run - because they're lying.) There are just tooo many factors to consider: future local markets (supply + demand), your acreage, the stand's products, and inflation rate. Inflation rate is probably one of the bigger factors (in my opinion) on why a dollar amount can't, and shouldn't, be stated.
Think about $10,000.
What type of car can you get with $10 grand today...
what about 10 years ago...
and 20 years ago...
So how do I answer when someone asks me what kind of return they can expect from their timber investment?
6% - 8% IRR
But what does that mean?
IRR = Internal Rate of Return
Which is the percentage of return you can expect in "x" number of years.
(Disclaimer: not the actual definition of IRR)
Investments are often spoken in IRR's because it takes into account inflation (more or less - in the way that since it doesn't provide you an actual $$ amount, despite how money "value" changes, you can still expect that percent return). This way it can be compared to other opportunities.
You can expect less than 1% return on your savings account at the bank.
The stock market is relatively volatile, ranging from negative% to 18%.
Real estate... well everyone knows that is all about location, location, location.
Okay, so again, so what...
So how do I know timber is a good enough of a return for you??
The answer is: I don't.
I can only tell you what kind of average return you can expect, IF you engage with and manage your property for its potential. It is up to YOU to determine if that return is enough for you (to determine what your personal discount rate is).
How do you determine what your discount rate is (what % of a return you need to move forward)? Because life is made up of choices - and for most of us, money is a finite resource that we must be wise with. So look at the opportunities you have to spend your money on - what are the returns you can expect on all those various opportunities (this will take into account how much you have to invest upfront AND periodically, and for how long before gaining any return back). Consider everything involved with those opportunities: time period, risks, intensity of engagement, etc.... and pick the one that best fits the "worth it" factor.
Still don't get it??
Well without getting too deep - full of math and formulas - all of which won't make you necessarily understand anything more -
Understanding what kind of return you need (your personal discount rate) to make it worth your while is ...
... kind of like ...
determining how big of a family you want:
1 dog . . . 1 kid . . . 2 kids . . . 4 kids + 3 dogs . . .
or . . .
to be the next 19 and counting family . . .
only YOU can make the decision of what number is right for you, your situation and your investment. Maybe that number is only a 3% or 4% return for you to invest your money, maybe you need at least 12% to make it worth your time.
I can only present you the facts and opportunities of what you can achieve when you start engaging AND managing your land.
Danielle Atkins is a forester, mother, and founder of the Life+LAND blog. Learn more at https://herandez4440.wixsite.com/lifeandland. The original blog post can be found at https://hernandez4440.wixsite.com/lifeandland/post/let-s-talk-money