Love the idea of making money off land you didn't have to do anything to? Then investing in mineral rights may be a great fit for your next real estate venture. Investing in mineral rights has the potential to provide big returns. but its complex nature creates barriers to entry. The jargon, regulations, classifications, and negotiations are completely different from a standard real estate transaction.
This article will give you fundamental knowledge pertaining to how an investor can make money in mineral rights while leaving the intricacies to the experts you'll invariably hire to assist you in this process.
What are mineral rights?
Mineral rights are legal rights or ownership to the minerals below the surface of real estate, which can include coal, oil, natural gas, metals, and more (air rights and water rights are not generally included in mineral rights). Depending on where you are in the world, the mineral estate may be government-owned for an entire country or they may be a landowner's right. In the United States, mineral ownership initially belongs to the property owner.
Essentially, the same piece of land has two owners: The surface owner has rights to the land above ground, while the mineral owner has rights to the materials, as stated in the initial mineral deed, below ground. You could own a property you intend to develop into a residential community, only to have the mineral rights holder inform you they're exercising their right to start fracking.
One of the most important distinctions for an investor to understand is that even though you may hold title to a piece of real estate, it doesn't necessarily mean you're the mineral rights owner. In the United States it is legal and fairly common to see severed mineral rights. This means at some point in the past, a previous owner sold the mineral rights ownership to another individual or perhaps sold off the land but retained the mineral rights for themselves.
Mineral rights classifications
There are different classifications for the various types of minerals, each having unique contracts, tax implications, and terms. This is where specialists come in. From an investor standpoint, mineral resources are broken down into sedentary and fluid minerals, then further classified by the government into the type of access each mineral necessitates, which can be:
- Meteorites or new mineral discoveries.
The classification will then dictate how those rights are handled. Just like real property, mineral rights can be owned, leased, or have easements. These rights may also have an established mineral royalty or licenses for a specific type of mineral, a predetermined quantity, or a set duration. This could mean, for example, you purchase the mineral rights to a property with a mineral lease ready to expire next year, allowing you to then renegotiate and profit from new terms.
How to profit from mineral rights
Due to the incredibly high costs associated with drilling or mining operations, a real estate owner almost always sells these rights to a mineral rights broker or an established company that specializes in mineral exploration and mineral extraction for that natural resource. This allows the real estate investor to profit from mineral rights without having to build expertise or invest their own funds into the drilling or mining project.
A mineral owner can structure a deal several ways: They can simply sell their mineral rights to another individual, staying as the surface rights owner, or sell the property with the mineral rights.
You can also create a lease agreement with a company interested in exploring the potential your mineral property contains. With this structure, the company has a designated amount of time to perform whatever analysis is needed and can sometimes begin extraction if the mineral proves itself. If the company begins exploration, there's usually an extension of the lease agreement into a second term. If the lease expires and no exploration or extraction has occurred, the lessee forgoes all rights.
This may seem like an unlikely scenario, but many companies will sign these leases to secure additional resources if the market improves without the full intention of actively extracting minerals from your land, leaving the lessor with income and unexplored mineral rights.
Lease agreements are most commonly used for oil and natural gas but are also sometimes used if a mining company is not certain of the mineral or coal reserves. There's typically a lease payment called a signing bonus when the lease is initially signed. It's an upfront payment to the mineral owner in addition to royalty rights or other agreed-upon terms. If they begin extraction during this lease period, you'll also receive royalty payments for a specified amount agreed upon when the lease was signed. These royalties can vary greatly but typically range from 12.5% to 25% (or more) of the value extracted from your land.
If you do intend to develop or utilize the real property for yourself, selling the mineral rights gives that new owner, or anyone they sell it to, the legal right to access and extract on your property at any time. This can mean drill holes, excavation, open pits, wells, machinery and equipment, pipelines, and more. Entering into a lease agreement or selling those rights should be carefully considered.
How to begin monetizing mineral rights
If your goal is to invest in mineral rights, the first step is to determine whether the property you own or the piece of land you're interested in purchasing still has mineral rights. This will entail a special mineral rights search with professional landmen. Your county and municipality will not have a record of any such transaction or separation of rights, so don't assume you have mineral rights just because your title company says the title is clear.
If you confirm ownership of mineral rights, you'll need to determine their potential value. This can be ascertained by consulting with a mineral rights consultant or reputable mineral rights broker. If you luck out and have valuable minerals you still have legal ownership over, it's quite possible those rights are worth considerably more than the land itself. But this will vary based on reserves, location, market, desirability, and proximity to existing resources or other projects.
To actually seal the deal and sign a lease or sell the ownership, good negotiation skills and knowledge of the particular industry will be critical. Generally, a specialized real estate agent or lawyer will be the ones who bring this potential to fruition. Not all these professionals will be well-suited to your particular mineral type and size, so seek assistance from an experienced broker or lawyer in the specific industry you'll be marketing to, as well as the scope or potential your project holds. Hiring the right person for the job will make or break your profits.
Hire a specialist
It's also a good idea to consult with an accountant about tax implications before buying or selling anything. The impact will vary depending on whether it's a sale or lease, what industry the mineral interest or royalty interest is generated from, and your other personal and business details.
Throughout the process of selling mineral rights, you'll be hiring and utilizing a lot of specialized professionals since this industry is so unique, with an excruciating amount of detail. Don't make the mistake of thinking your experience as a real estate investor transfers to this industry unless you truly have the boots-on-the-ground experience necessary.
The Millionacres bottom line
Mineral rights can potentially earn great returns and potentially even long-term, reliable passive income. But they do come with some significant risks and a lot of specialized knowledge. Market variability could turn a great deal into a complete bust in a matter of weeks. It's also important to seriously consider the potential use of the property if expecting to retain the surface rights for alternative purposes. Figure out the endgame, hire the right team, and you could be on your way to serious returns.