Current economic conditions, uncertainty in the markets, and recent events have serious investors looking for other ways to ensure their capital as well as their portfolio is protected as much as possible.
In particular, real estate has experienced unique, extraordinary challenges today.
When you think of real estate investing, traditional REITs and commercial office buildings are top of mind. While it’s true that they are good investment opportunities, there is a much lesser-known asset class that qualified investors should consider: investing in mineral rights.
What are mineral rights?
Mineral rights work like property in the United States. They can be transferred, sold, and leased, similar to any other real estate. Typically, they are separated from the surface estate, making mineral rights more liquid compared to traditional surface real estate.
Mineral rights refer to ownership rights to underground resources like metals, fossil fuels (coal, oil and natural gas, etc.) and mineable rocks. Having mineral rights mean that you have the right to extract a mineral or receive payment for its extraction.
In the United States, mineral rights can be privately owned. This means that those with rights to valuable resources on their property can sell those rights to private companies, gaining ongoing royalty payments or substantial up-front payments. They can also lease the right to develop these minerals to companies that have the ability to extract valuable natural resources.
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An asset class that generates long-term income
Energy companies create royalty for mineral owners by leasing mineral rights. Mineral rights owners then receive their pro-rata, or equal share of the proceeds from the natural resources derived or extracted from their land. Mineral rights owners generally receive 12.5 to 25 percent of the revenue generated by the wells drilled in their area.
Investment opportunity: Mineral rights investment as a steady source of recurring revenue
Those who are looking to diversify a portion of their real estate portfolio may find that mineral rights are extremely profitable. For one, they can transfer their capital into a more liquid asset class that is capable of producing recurrent revenue. In addition, it lets them take advantage of IRS tax code 1031, allowing them to defer tax on capital gains on the sale of their royalty, mineral rights, or property when exchanged for another qualifying property or by reinvesting the proceeds from a sale in mineral properties.
A royalty rights owner does not need to worry about unexpected repairs, costly maintenance, or vacancies, unlike rental properties. Also, a royalty owner will not be held liable for developing the acreage or the costs of drilling a well that has been transferred to the operator. This makes mineral ownership a high-yield, low-risk source of passive income.
Effective selection is key to success
Serious investors will want to build a diversified, yet balanced portfolio of developed, profitable properties. Hence, it’s best to purchase mineral rights in places with proven reserves to ensure immediate yield.
Partner with a company that has reliable industry experience, enabling them to swiftly identify and acquire assets.
To learn more about how DW Energy Group can help you get the maximum value from this asset class, get in touch.
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Sources:
“Mineral Rights,” Investopedia, https://www.investopedia.com/terms/m/mineral-rights.asp
“Mineral Rights Can Make You Rich,” Wall Street Journal, https://www.wsj.com/articles/mineral-rights-can-make-you-rich-1499638593
“What Is a 1031 Exchange? Know the Rules,” Investopedia, https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx