By investing in mineral rights, you can receive greater returns on your real estate investments than just equity appreciation. Mineral rights to oil, coal, natural gas, or other valuable natural resources can substantially boost your investment portfolio as labor-free sources of revenue or passive income. However, investing in mineral rights is not a simple as it appears. Reading this article will help you gain insight into earning money in mineral rights and finding the support you will need.
Key Takeaways
At the end of this article, you will:
- Understand the details of mineral rights investing
- Appreciate the advantages, risks, and opportunities in mineral rights investing
- Know why mineral rights are a good investment and how they compare to alternative investments in improving your portfolio
How do Mineral Rights work?
In the United States, mineral rights owners have legal possession and control over minerals underneath their real estate property. These rights give the owners the authority to extract any of the minerals listed on the original deed. Some of these minerals include oil, natural gas, and coal. However, the mineral rights do not include air and water rights.
Many people assume that mineral rights naturally come with a real estate purchase, but it’s very common for U.S. properties to have severed mineral rights. Sometimes, a property can have two separate owners because previous property owners sold their mineral rights or sold their surface property while keeping the mineral rights. A sticky situation can occur when surface and mineral rights owners don’t know the other exists.
Mineral Rights Industry Background
Although investing in mineral rights can be lucrative, the process can stymie most investors with its unique language, rules, classifications, and negotiation protocols. Also, mineral rights laws vary from state to state. Even the process of finding out whether a property has mineral rights and ascertaining its value requires a mineral rights consultant, attorney, or broker.
Eckard Enterprises has more than 35 years of energy asset management experience in the U.S. gas and oil industry. Focusing on energy assets that provide immediate cash flow, Eckard Land and Acquisition helps you through every aspect of minerals rights acquisition, maturation, and liquidation. In addition, it specializes in securing undervalued assets and redeeming them for maximum value.
Mineral Rights Classification
Whether sedentary or fluid, the industry classifies natural minerals by characteristics and functions. Each mineral rights classification comes with a separate set of contracts, tax implications, and conditions. The official government mineral right classifications are:
- Locatable: Metallic and non-metallic minerals like gold, silver, hard rock, and feldspar
- Leaseable: Energy minerals like oil, gas, and coal
- Salable: Minerals (sand, gravel, and dirt) sold in bulk at low unit prices
- Meteorites/ New mineral discoveries: These minerals can be more valuable than precious metals
Owners must apply the mineral rights according to these classifications. If you purchase mineral rights to a property, you should make sure you understand all of the tax and regulatory requirements of the minerals’ classifications.
Are Mineral Rights Profitable?
The task of excavating and extracting minerals from the earth requires a lot of money, time, machinery, and expertise. Even the exploration phase is a difficult, intensive project that requires a company with a proven track record in the exploration and mining of minerals. For this reason, the easiest and most efficient way to profit from mineral rights is to sell or lease the rights to a company that can run a profitable extraction operation. In return, you can receive a substantial lump sum from the mineral rights sale or income from a lease or royalty agreement.
The most popular option is to sell the rights to a mineral rights broker or a reputable company that mines the types of minerals on your property. With this arrangement, you can either sell your property outright or sell the mineral rights and keep the surface property. If you decide to keep the surface property, make sure the company’s plans for the property don’t conflict with yours.
For owners who want to generate income while maintaining mineral rights, leasing the underground property to an established mining company is a good option. This arrangement yields income from lease payments and royalties from the yield of extracted minerals. The leasing contract establishes specific time frames, the royalty agreement, and other conditions. Also, if you own both mineral and surface rights, an oil company may pay you a flat rate to retain future rights to drill on the land.
Although mineral rights investing has greater profit potential than many alternative investments, it has positive and negative features. Here are some important factors you should consider before investing in mineral rights.
Benefits
Investing in mineral rights has advantages that alternative investment opportunities don’t have. Although some of the benefits are conditional, the upside potential is undeniable, particularly in oil and gas.
- Flexibility
When you own mineral rights to a property, you have the options to:
- Sell the rights for a lump sum
- Generate cash flow without managing laborers, assuming liabilities, or incurring big expenses
- Sell all or part of the royalties agreement while maintaining ownership of the mineral rights
- Receive a “lease bonus” by leasing the mineral rights to an oil company
- Make the mineral rights and royalty agreements part of your estate planning
2. Income Options
Investing in mineral rights also has options for converting your income dispersion. For instance, if you need a lump sum payment instead of regular royalty payments, you can sell your royalty agreement without losing the mineral rights or sell a portion of the rights and pass on the rest to your survivors.
Risks
Most of the risks in mineral rights investing involve the element of the unknown. For instance, if the leasing company doesn’t find minerals on your property, you don’t get royalties. There is also the remote possibility of buying mineral rights that include a bad exploration and production company. This type of arrangement can bring negative financial and legal repercussions.
Royalty rates for minerals like oil and gas depend on current demand. As a result, a major price drop will negatively impact the value of your mineral rights. However, you can considerably reduce the risks in mineral rights investing by partnering with an industry expert firm like Eckard Enterprises.
How Mineral Rights Relate to Money
With the proper due diligence and professional help, mineral rights investments can be versatile and profitable additions to your investment portfolio. These instruments can be a source of large net cash returns, passive income, and additional assets to your estate planning.
Whether you have a long-term or short-term investment strategy, mineral rights can be a profitable investment. To learn more about the opportunities to invest in mineral rights, contact us today.
