The potential for high returns and long-term income make royalties an attractive option for both cash and 1031 investors. Some of the most important advantages that clients find often appreciate exploring the idea of adding royalties to their portfolio are transaction size flexibility and superior cash flow potential.
Mineral interest ownership has much more flexibility than traditional real estate. A single property can be divided among many different owners, each with independent ownership of their interest. Due to the flexible nature of minerals, clients can customize an investment level that works best for them, especially when part of a 1031 exchange where every dollar counts as you work to preserve your capital gains.
Clients have often turned to royalties when faced with an odd amount left over in their exchange after acquiring a piece of traditional real estate. This left-over amount is commonly referred to as “boot” and royalties can be a solution to make sure your exchange is maximized.
From a return standpoint, oil & gas royalty owners typically see annual yields that are about double when compared to today’s triple-net real estate market. Because the royalty industry is much more fragmented and inefficient than traditional real estate, the opportunity still exists for returns in the 8-12% range.
While there are different risks that exist with oil and gas, many clients appreciate the non-correlated nature of energy ownership with their other holdings, including real estate and the stock market. The natural hedge against inflation that royalties provide is also a fundamental reason why many investors add this asset class to their portfolios.