Farmland vs Timberland: Which Is A Better Investment?

Key Points

• Land investment has been solid for thousands of years, providing opportunities to build structures, grow crops, and harvest natural resources.
• Farmland and timberland investments have similarities, including stable returns and low volatility, making them attractive during times of uncertainty.
• Differences between the two include farmland's ability to generate predictable rental income, while timberland's income can be less consistent due to the fluctuating prices of lumber.
• Farmland may be a better choice due to its predictability, more expansive investment options, and the threat of composite building materials reducing demand for lumber.
• Diversification is critical to successful alternative asset investment, and owning farmland and timberland could be a solid option.

The land has been a solid investment for thousands of years. You can build structures on it, grow crops or harvest the natural resources already present on the land.

Many investors looking to invest in land come to an impasse when deciding whether to invest in farmland or timberland. While both have generated solid returns, investors should be aware of some key similarities and differences between them.

Returns from timberland, as well as farmland, have both outpaced the stock market during regular market periods. As a result, farms and lumber are boring commodities with significantly less volatility than stocks.

However, during times of uncertainty, these boring investments become highly desired assets.

Invest In Land Today!

Similarities Between Farmland And Timberland

Both assets being cultivated properties make them stable and rigid, with returns that aren't affected like stocks.

• Both provide you with the ability to make money by holding onto the land (asset appreciation) as well as deriving money from the land
• Returns for both investments over the last few decades have been high, often outpacing the broad stock market
• Since both are considered low-risk investments, the volatility or up-and-down price movement is low
• Both of these are illiquid investments, meaning it is not easy to sell them and convert them into cash
• Both are a long-term 5+ year investment in most cases
• The correlation between timberland/farmland prices and the stock market is low, making this a great way to hedge or diversify into alternative investments
• Both investments have outpaced inflation
• Growth in populations worldwide means that we will need more food to feed everyone and more lumber to construct homes

Differences Between Farmland And Timberland

The main differences between farmland and timberland stem from the details of the natural resources they yield.

• Timberland is susceptible to the “boom and bust” cycles of the housing market, meaning the prices of lumber could significantly impact returns.
• If you rent out farmland, you can expect to earn rent on a monthly, quarterly, or annual basis
• With timberland, you are sitting on a commodity, and you have to decide when to cut the trees and sell the lumber, making the income less consistent
• There are new composite building materials that are competing with lumber
• However, there are no man-made alternatives to undermine the demand for produce, bread, meat, etc.
• There is a wider array of farmland investments available today versus timberland investments.
• Timberland is exposed to a significantly higher risk for fires versus farmland, especially during droughts

Conclusion

Owning both could be a solid option if you want to further diversify into alternatives.

However, if you have to pick just one, farmland seems to be the better choice for the following reasons:

1. Rental income from farmers is far more predictable and consistent than trying to sell your lumber at the perfect moment
2. There have been massive fluctuations in lumber costs since the pandemic, which would jockey your profit margin around
3. It's far easier to gain exposure to farmland today compared to timberland due to the vast array of farmland investment platforms available
4. Composite building materials are threatening the future demand for lumber, especially if prices keep climbing for wood

Based on historical returns, you probably won't go wrong with either. However, diversification is the best way to ensure this is the case.