As I’ve been sharing all week, I’m “taking over” The Bleeding Edge and sharing a variety of new ideas to help subscribers weather these volatile markets.
The first half of this year has not gone as we have hoped or expected. And I know all readers are feeling the pain right now (I am as well).
The best thing we can do is to take a step back, reassess our strategy, and find ways to ride out this volatility as best we can, until more normal market conditions return.
So far, we’ve covered fixed income strategies and select commodities as ways to diversify our holdings right now.
Today, I’d like to share another strategy that can serve us well during this unprecedented market. It’s something I suspect few of us have ever considered. But – when executed correctly – these investments can deliver yield and outsized returns, regardless of what equity markets do next.
Diversifying into Real Estate
One of the smartest things that any investor could have done over the last few years was to finance, or refinance, a 30-year fixed-rate mortgage.
For most of 2020 and all of 2021, average rates were below 3.5%, and for those who timed it perfectly, there was a small window at the end of 2020/into early 2021 when it was possible to lock in a rate of less than 3%.
There’s no better way for investors to fight a government, that is actively devaluing its currency, than by locking in a low fixed-rate 30-year loan. This is something I have recommended several times over the past two years.
Assuming that the real estate is purchased in an area that is growing, over time, the value of the underlying asset (the home and its land) will appreciate significantly, and the mortgage is paid back with devalued dollars.
However, I know owning investment properties may not be desirable or feasible for all investors.
For starters, owning investment properties takes time. Even when we hire a good property manager, we still need to stay on top of things, work with the property manager, occasionally visit the properties, and take care of our own tax- and accounting-related issues.
The same is true for investments in income-producing commercial real estate. This is an asset class that, on average, has produced an annual return of 9.5% between 2000 and 2020 – compared to the S&P 500’s average annual return of 8.6%.
But there are ways to gain exposure to real estate without needing to purchase properties ourselves… and dealing with all of the upkeep and headaches that come with it.
And it may surprise us to learn that the type of land that interests me the most right now has nothing to do with homes…
Watching our Investments Grow
Yesterday, we had a look at how important it has become to gain exposure to the commodities sector, specifically energy and agricultural commodities.
As a result, two exciting areas for investing in hard assets are in agricultural land and timberland.
This number might shock some of us, but the average annual return on farmland over the last 20 years is even higher than commercial real estate. Farmland has delivered 12.24% returns, which includes investment gains from both income generated and capital appreciation.
Perhaps even more unique to the asset class is that farmland returns have been positive every year since 1990.
As for all the reasons I shared yesterday, I believe the ongoing war in Ukraine will lead to a food crisis later this year. I expect agricultural land that can produce food to rise as a result.
Over the last year, I’ve been doing a lot of research in this area. And of course, I’m looking for ways to bring these kinds of alternative investment opportunities to my subscribers. It’s not easy to do at scale, however, as these assets haven’t been securitized to the same degree as other mainstream assets.
Yes, it is possible to purchase land ourselves and become a farmer, or a property manager, of that land. Of course, some will find that lifestyle attractive. But most of us already have a job, or two, and are too busy to entertain something like that.
In order for investors to access this asset class, outside of traditional farmland brokers, some great alternatives have emerged in the last few years.
There are now platforms related to agricultural land that structure these investments as funds. In doing so, it takes all the maintenance and upkeep out of the equation. For those interested, it is worth checking out Farm Together and Acre Trader.
The concept is simple. These platforms aggregate investors into a fund that tends to take partial ownership in agricultural land. They tend to focus on partnering with farmers, landowners, and developers to find opportunities that produce the combination of consistent yields, and – over time – capital appreciation, when the property is eventually sold.
It may come as a surprise, but Microsoft founder Bill Gates is the largest private farmland owner in the U.S. at 269,000 acres. That may sound like a lot, and it is, but for context, there are more than 900 million acres of farmland in the U.S.
Even for one of the world’s wealthiest individuals, owning farmland is appealing. It is not only a great way to generate income, and in time, capital appreciation, but it is also an excellent way to diversify our assets.
Investing in Timberland
That leads me to timberland. Unlike the name Bill Gates, Red Emmerson is probably not a name that most of us would recognize. Yet he is the number one owner of timberland in the U.S. His business, Sierra Pacific Industries, owns 2.33 million acres of timberland.
Interest in lumber – and thus timberland – has really jumped in the last two years. From the March 2020 lows at the outbreak of the pandemic, to the May highs last year, the price of lumber rocketed higher at an almost unbelievable 540%.
Naturally, those who were holding timberland have been in a perfect position to harvest outsized returns.
And while what happened with the price of lumber in the last two years is an outlier, the price of lumber is known to swing roughly between a range of $200 and $400 per thousand board feet over a number of years.
For patient and smart investors, these swings can be used to maximize income. After all, owning timberland means that the income-producing asset – the timber – is literally growing over time.
Timberland owners have the ability to allow their trees to grow larger when lumber prices are low, and harvest when prices are high. And those investors that are looking for a more consistent income can harvest portions of their timberland each year, regardless of prices.
Even apart from timing harvesting of timber, U.S. timberland performance has historically performed well over a multi-decade period of time.
Between 1971 and 2010, timberland was a fantastic investment, delivering average annual returns of 14%. Since then, a range between 3%–7% is more normal. Again, these are just averages. Investors can stack the deck in their favor by focusing on high-quality land, the tree types, and using the swings in lumber prices to their advantage.
Aside from the obvious attractive investment profile of investing in timberland, which also has a low correlation to equities, it also comes with the added benefit of being able to enjoy the land. Many use their timberland holdings to build retreats for enjoying the outdoors, hunting, fishing, hiking, and just relaxing from this chaotic world.
But once again, I know investing directly in timberland may not be feasible for all investors. Here again, there are “one-click” options to gain exposure to this asset class.
For those who might be interested, LandVest is a great place to start, and Molpus Woodlands Group is another alternative. And of course, there are a variety of real estate investment trusts (REITs) that allows investors to gain exposure to forested lands directly.
This is an area my team and I are actively researching. I could envision a scenario where the Brownstone Research team contracts with local experts to assess land available through one of the above options. In that way, we could provide subscribers with all the research they would need to make educated investments in this asset class.
Investing for Generations
As we progress through our investing lives, and our careers, we eventually will get to the point where our goal is no longer to be an active investor or trader, and we don’t even need outsized returns. The goal, especially once we step down from our full-time jobs, is to have a portfolio of income-producing assets.
And in this crazy world of prolific money printing, investing in farmland and timberland is a great way to not only generate annual income, but also to insulate against bad government policies. It is also a great asset to hand down to the next generation.
This is an area that my team and I will continue to research for the benefit of subscribers. If we can uncover great timberland and agricultural investments available to a wide group of subscribers, we will have one more way to diversify our portfolios in this volatile market.
Regards,
Jeff Brown
Editor, The Bleeding Edge