Q&A about mineral rights and royalties that can totally shift your investment strategy
Colorado’s oil and gas industry is seeing a major boom and with the increased interest in producing domestic fuels investors have the opportunity to expand their investing strategy with the potential for a major payoff.
Choosing to invest in mineral rights might not be something you’d typically consider but we asked mineral rights expert, Robby Barnes, from Madison Capital, to answer a few of our questions and here’s what he had to say:
Q1: What are the 5 things investors must know about 'Underground Investing' and why are they important?
A1. Underground investing refers to the acquisition of mineral rights in areas where oil and gas is produced to generate royalty income.
A2. The two primary factors associated with royalties are production and pricing - how much is extracted each month and what price it is sold for.
A3. In order to consider this strategy investors need to ask themselves: "Do I believe that the price of oil and gas is going to go up or down over time?"
A4. If the investor is bearish on pricing, then I would advise them to look at a different asset class.
A5. For those that feel that pricing will rise or remain within the current range, we recommend taking a portfolio approach to acquire interests that provide the following:
- diversification - small interests in multiple wells with multiple operators in different fields to mitigate concentration risk
- Long-lived reserves that can provide decades of income
- current production with additional drilling locations for future wells
- exposure to areas of dynamic growth
Q2: Why is this investing strategy something investors should consider?
The US is in the midst of an energy renaissance. Over the next several years, domestic oil production is expected to reach levels that we have not approached in nearly forty years. At the same time, there is increasing demand for U.S. natural gas here domestically to fuel our commercial vehicles as well as overseas where countries are paying 2-3 times more than the current spot price. The advantage to mineral owners is that they will participate in the revenues from this increased production, but not in the costs of drilling the thousands of wells it will take for the industry to reach the goal of energy independence. For real estate investors, the fact that mineral rights are considered "like kind" for 1031 exchange allows them to be used to defer capital gain liability on the sale of investment property as an alternative to real estate assets or as a piece in a diversified exchange.
Q3: How long has this strategy been around and do you think it will gain in popularity?
Mineral and royalty interests as an asset class have been around as long as the oil and gas industry itself. It is still evolving as an alternative investment vehicle and remains pretty niche; however, private investors have more access to these assets today than ever before.
Q4: Can you share an investor success story using this strategy?
We were introduced to a 1031 exchange investor who had found and identified replacement real estate properties but their total purchase prices were falling short of his relinquished property sale and he was facing a tax liability which was approaching 30% on the remaining "boot". Because minerals are sold as decimal interests, we were able to put together a portfolio of royalties for the exact amount of his shortfall - it was something like $129,571. He was able to defer every dollar of tax liability while diversifying his exchange with a non-real estate asset.
Join ICOR and Robby at the May monthly meetings to learn more!
Tuesday, May 13th
Wednesday, May 14th
Denver Monthly Meeting - Lease Options, REOs, and Mineral Rights for Real Estate Investors
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Thursday, May 15th
*special date, just for May
Northern Colorado Monthly Meeting - Lease Options, REOs, and Mineral Rights for Real Estate Investors