Investing in mineral rights allowed me to make money without doing any work or maintenance. While it might sound like a get-rich-quick scheme, investing in mineral rights is complicated.
I needed to understand the types of mineral rights and how they can pay off. I also had to do a lot of research before I decided what mineral rights to buy. The purchase isn’t as simple as buying stock, so I wanted to understand everything required before I was stuck halfway through the process.
People come to own mineral rights in many different ways. Sometimes, they’re handed down from person to person in a family. Other times, a court might order mineral rights to stay with a certain person, like the homeowner, or to be taken as payment from someone who needed to repay a debt.
As I did, it’s also possible to invest money in mineral rights. After learning to invest in mineral rights, I wanted to share my experience. It’s a great way to secure your money and potentially get a big payoff.
What You Need to Know Before Investing in Mineral Rights
- Proper knowledge of mineral rights
- Starting capital
Mineral rights refer to the ownership of minerals in the ground. Some minerals found underground include natural gas, coal, oil, and metals. Air and water rights, even if found in the soil, are separate things, so I won’t address them in this article.
It’s important to research your locality because some governments completely own mineral rights, while in other locations, the landowner can own mineral rights.
For example, in the United States, anyone who owns property also owns the mineral rights to anything found on that land. In some cases, the property can have two owners.
The person who owns the home is one, but they can sell the mineral rights of that same plot of land to someone else. The homeowner would own things above ground, while the mineral rights owner could claim anything in the soil.
This double ownership can cause problems. The mineral rights owner might choose to investigate what’s underground, which can disrupt the lives of people who live above that land.
If you’re buying property, you’ll also want to look into who owns the mineral rights.
Types of Mineral Rights
There are different types of mineral rights. Knowing these distinctions helped me make the right choice for my investment. The types include the following:
- Mineral Interest (MI)
- Royalty Interest (RI)
- Overriding Royalty Interest (ORRI)
- Working Interest (WI)
- Non-Operated Working Interest (NOWI)
- Net Profits Interest (NPI)
There are many things to understand about these six types of mineral rights. They all have pros and cons depending on what you want to get out of your investment.
Mineral Interest
This type of interest is the most common agreement because it’s so straightforward. In many cases, especially in the United States, the person who owns the house and land also owns the mineral rights by default. Anyone who wants to drill into the land must get permission from the owner and pay them accordingly.
Mineral interest rights allow the owner to explore the minerals in the specific land area. The owner can develop anything found underground and produce minerals without restriction.
They’re free to collect royalties from anything found here, as well as sublease the land to other people or utility companies for profit.
Since minerals are beneath the surface, owning mineral interest means the owner also has a right to the surface land, within reason.
They can use the space they need to access the minerals underground. Once you’re looking into mineral rights in addition to homeowner’s rights, mineral rights become the dominant estate.
Royalty Interest
A royalty interest is one of the mineral rights that pays off the most. The owner makes money off the land without having to put any money in. That means there are no upfront expenses, like drilling or creating a well on the property.
The owner can keep this property—and make money from it—as long as they want. They have full use until they sell or terminate their rights.
If the owner leases the mineral rights to a company, they’re entitled to royalties until the company finishes work. At that point, the owner can search for a new company to lease to and earn more royalty interest.
The owner can lease mineral rights to several companies at once if there is enough land and no overlap in the minerals they’re searching for. The paperwork for these agreements must carefully outline what land each company can mine. This will prevent disruptions and legal problems.
It’s possible to get different royalty percentages from this interest agreement. The paperwork will describe the exact amount and what it applies to.
For example, the owner doesn’t automatically get 20% of all the underground minerals. The percentage refers to the entire land, and the company only drilled a few square feet to find the minerals. Therefore, they divide that percentage by the land they end up accessing.
Overriding Royalty Interest
Overriding royalty interest has some limits that mineral and royalty interest don’t. The owner only gets royalties while production occurs in the specific land area.
Once work is completed on that property, the mineral rights lease expires, and the owner has no entitlement to the land or money.
Selling an overriding royalty interest once the owner decides to move on has some stipulations. They can sell the percentage to someone else while keeping an additional overriding royalty interest for themselves.
This doesn’t mean that they’re not selling the full amount to the next owner—rather, they’re adding a small percentage that any utility company will have to pay.
By doing this, the first owner isn’t completely giving up the opportunity to profit from their mineral rights.
They’ve made money from the sale as well as kept the option to continue to earn royalties. The cost comes from the utility company rather than the new owner, so there’s no reason the next potential owner would decline this offer.
Working Interest
Like mineral interest, working interest allows the owner to explore minerals in the land area you own. The owner can develop and produce them as well. However, since a utility lease granted this permission, some restrictions exist.
This type of mineral right is the only one where the owner has to pay expenses. These charges relate to drilling into the land, operating a well, and more. It can be costly if the mineral rights owner is the one drilling underground.
However, working interest is favorable if the owner leases the mineral rights to a utility company.
The company then pays all expenses related to accessing the minerals in the soil. About 20% of the revenue is royalties paid to the owner.
Owning mineral rights and leasing the working interest to a company keeps money coming in for the original owner. They get paid royalties even if the utility company hasn’t broken even regarding all the expenses they put into the work.
Non-Operated Working Interest
Investors also refer to non-operated working interest as non-executive mineral interest. These rights are different from mineral interests because they can’t lease rights. The owner can earn royalties proportional to their ownership percentage.
This type of mineral rights ownership is common when the rights are passed down through family members. It can also apply to people who own land and sell the home on the surface but want to retain a portion of the mineral rights.
Because the owner doesn’t operate the mining machines, they’re classified as a non-operated working interest. They can earn money but aren’t active in the work required to access the minerals.
Net Profits Interest
This type of mineral right isn’t too common, but it’s an option depending on the owner’s goals. Owning net profits interest means the owner only makes money when there’s a profit associated with the land.
This type of mineral right is a subsection of non-operating working interests. The owner doesn’t have any input into the development or cultivation of the land itself. They let a utility company mine and drill the land, but the mineral rights owner won’t get paid if they don’t find anything.
It’s possible to see this as no harm and no foul, but people buy mineral rights to make money. The owner didn’t put any money into mining the land, but they let a company drill and got no compensation, which is disappointing.
On the other hand, if the owner inherited net profits interest mineral rights, they haven’t invested any money. Therefore, they’ll only benefit from anything found on the land. Depending on what the company finds, they might win big. Since the owner isn’t liable for any losses, they only stand a chance of making money, not losing anything.
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How to Invest in Mineral Rights in Steps
Step 1: Find Out Which Minerals Are Lucrative
To start mineral rights research, I had to determine which minerals were lucrative. Investing in mineral rights and having nothing pay off is possible, so I wanted to ensure I was picking the right properties.
Mineral rights that are worth the investment aren’t always an obvious answer. It depends on the area because some minerals are worth more in a location where they’re rare.
The most valuable mineral in one county might be worth next to nothing in a neighboring area because it’s so plentiful there.
It’s also important to consider what it’s worth to you. I knew I wanted to try investing in mineral rights to see what it was like, so it started as an experiment for me.
But I had a few goals in place that I was hoping to meet. If I hit those goals, I knew mineral rights were worthy investments and would focus more on this outlet.
The goals can be any benchmark that provides value. I wanted to find land that wouldn’t require a huge upfront expense. If it cost over a certain amount, I wanted to return that return on investment (ROI) in just a couple of months.
Other mineral rights investors want to buy a property that’s near them. They don’t want to spread out their portfolio too much, so they want to keep their money close to home.
Some people look for specific minerals because they want to lease the land to utility companies. Whether you have a plan like that or not, it’s good to know what makes this process worth it to you.
Many minerals have high values regardless of location. The top five most valuable minerals include the following:
- coal
- copper
- diamonds
- gold
- oil and gas
Not all states have oil and gas reserves. In the United States, 10 states hold about 80% of the total reserves:
- Texas
- North Dakota
- Alaska
- California
- New Mexico
- Oklahoma
- Colorado
- Louisiana
- Utah
- Wyoming
Other minerals are valuable, and many have increasing prices according to demand. Lithium, graphite, cobalt, and nickel will become more valuable since they’re used in batteries. The world is shifting away from other power sources, and in time, manufacturers will greatly increase battery production.
While researching minerals in certain areas and checking their value, I kept an eye on the general news. I wanted to stay informed regarding what minerals were in need and for what reasons. This kept me from investing in mineral rights that wouldn’t have any demand as certain products fell out of favor or weren’t in public use.
I did background research into minerals as well. Some state governments define things as minerals, and other states don’t.
Before I invested, I wanted to make sure what was in the land was legally considered a mineral. In a 2004 case, the United States Supreme Court deemed sand and gravel not minerals, so it’s important to be aware of such rulings. If I couldn’t find a Supreme Court case about something, I double-checked the state laws.
It’s better to be extra cautious on the front end instead of ending up with worthless mineral rights.
When researching what each state classified as minerals, I found information about mineral rights in each state’s laws. In some states, fracking is legal, but others don’t allow mining natural gas.
Since this research went hand in hand, it was nice to know what states considered minerals and how they sold rights simultaneously. The knowledge helped me make decisions about my investments.
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Step 2: See What Is Available to Purchase
In my research, I found some areas selling land with non-producing minerals. These locations didn’t have much oil or gas, so they were trying to capitalize on what they could, which would have resulted in a bum deal for the buyer.
Even when I was searching in areas that people knew to have oil or gas, I figured it was still possible to find land with little to no minerals available. I had to do some digging (no pun intended) to find out as much as possible about each parcel of land.
First, I found the legal description of the property. I looked up the property according to the address on the county property assessor’s page. When searching for undeveloped land without an address, I clicked on an interactive map to find the right area.
Next, I found the legal description in the property specifications. The location of this information varies depending on the state and county, but it’s easy to find on any legal property records.
Then, I took that information to my state’s oil and gas regulatory agency. They have an online geographic information system (GIS). This feature lets me find the property using the legal description, so I know I have the right location.
On the agency’s GIS, I accessed the Public Land Survey System (PLSS). From there I could see the minerals, wells, and other activity on that parcel of land. Better yet, I could see the information for the surrounding property without completing another search from square one.
I put all the information from the oil and gas agency into a spreadsheet to see all my research. I was looking for land with many potential payoffs, so I wanted to ensure I had everything I needed.
After completing this process for several parcels of land, I could easily compare and contrast data. I didn’t have to backtrack and redo any searches because I kept good records. Spreadsheets keep everything organized and prevent wasting time when making such an important investment.
Even when I finished researching mineral rights, I kept the spreadsheet. If I want to invest more later, I’ll still have all the information. Plus, I can add columns to keep records about royalties, outsourcing, leasing, and more.
Step 3: Buy the Mineral Rights
After I did all the background research, I was ready to invest in mineral rights. Naturally, the next step is buying the mineral rights. There are many different ways to go about this. Almost every way involves the help of a professional, which I can’t recommend enough.
Investing your own money in the stock market or a startup venture is one thing, but when you’re buying mineral rights, there’s a lot at stake. I wanted to make sure I was doing everything right so I wouldn’t get ripped off or accidentally overstep some legal boundaries I was unaware of.
Regardless of how someone buys mineral rights, it’s important to know what authority comes with the ownership.
For example, I wanted to ensure I could extract any minerals found in the land without limits. I also always wanted to know what I’d have to do to prevent property damage since the county can have a say in the appearance of the land.
Some agreements let owners determine fundamentals, such as:
- how the companies conduct their mining procedures
- when the mining happens
- what the company does to the property after mining
Having all this outlined ahead of time saves a lot of stress later. I knew that I could oversee the mining of the property regardless of which company or agency I was working with.
But because of these documents, I knew I had to repair any land damage on my own, so I adjusted my profit margin accordingly.
The owner isn’t the only one who must agree to the mineral rights terms. I wanted to go in and get everything I wanted, but just as with buying real estate, it’s a give and take. I had to compromise on a few issues, like the damage repairs.
I didn’t negotiate the contract independently because I didn’t know enough about mineral rights then. I know more now, but I don’t regret using an attorney with experience selling and transferring mineral rights. They were diplomatic and explained everything, so I knew what I was getting and felt empowered during the sale.
Auction
Going through an auction house is the easiest way to buy mineral rights, but it’s important to understand what’s for sale.
When I looked at mineral rights through auctions, it seemed too easy to get ripped off. There were listings for rights that wouldn’t pay off for more than 50 years.
However, finding high-quality mineral rights at reasonable prices is also possible. Since it’s an auction, I looked for listings with low prices. I knew that the bidding process would raise the prices and possibly push them beyond my budget.
There are different types of auctions to look for. Some auctions only accept accredited buyers. EnergyNet is one big name that follows this procedure.
An accredited auction means the auction house called my advisor and reviewed my financial records before I had a chance to bid on anything. They want to ensure everyone bidding has the funds to buy the mineral rights they’re selling.
Unaccredited auctions are open to anyone. Of course, they still expect you to pay for the rights you bid on, but there’s no background check to get in the door.
These auctions might sell mineral assets directly, like oil and gas. Others sell the farmland and require you to bid separately for the land and the mineral rights.
Most auctions take place online and are always open.
Each listing is live for a week or two before going to the highest bidder. Some auction houses hold quarterly sessions so people can bid in person. These auctions still usually have a live stream for online bidders to participate.
I went into an auction thinking I’d get mineral rights for a steal if no one outbid me, but most listings have a reserve price. If no one bids high enough to meet the reserve, the listing closes but doesn’t count as sold.
In many cases, the owner will contact the highest bidder to try to work out a deal. Even if you’re not the winner, you can negotiate a good price from an auction.
The government holds the auction if the mineral rights are part of public land. It’s a public bidding option, open to anyone. The rights go to the person who places the highest acceptable bid—not just a low offer that doesn’t get outbid.
Brokers
Using a broker is beneficial because they do the legwork. A broker will list someone’s mineral rights for sale, usually through an auction. The owner pays the broker a fee based on how much the final sale makes.
Buying mineral rights that owners list with brokers can be frustrating because brokers work with the seller’s profit in mind. They want to get the highest price for mineral rights because then they’ll earn more as well.
Going through a broker isn’t always a bad idea for a buyer. Since the broker is working with the seller, it can be possible to negotiate certain things during a compromise.
After all, once you’re on the hook, the broker wants to close the sale. It’s similar to negotiating when buying a house because you ask for certain things you want, but you might pay a bit more for it.
Private Placement
Most mineral rights sales are private matters since someone owns and sells the land. Unfortunately, most private sales are never advertised because the rights are sold directly from person to person.
I was able to find a private sale, so I got a great deal. Since I was working directly with the owner, I had the opportunity to vocalize my needs and wants. With a real person hearing my concerns, I had a better chance of getting a good deal.
Interacting with the seller can make compromising much easier than going through a broker or auction.
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Step 4: Transfer Ownership
Buying land doesn’t necessarily mean the mineral rights go to that same owner. Therefore, transferring ownership of mineral rights is a crucial step in the process.
When people buy mineral rights through a broker, auction, or private sale, they sign a deed. This deed can also encompass the physical property if the owner sells both together.
But for buying mineral rights only, there’s a separate deed that outlines what exactly it covers. It will also outline specific details about percentages and royalties if it’s not an outright sale.
People who pass their mineral rights to their children can do so by mentioning them in a will. The probate court takes the information from the will and helps transfer ownership from the deceased to the children. This occurs even if specific percentages get distributed among several people.
Some investors choose to lease mineral rights instead of buying them. These agreements involve lease paperwork, just as rental properties do. Instead of completely transferring rights, the lease will outline the specific terms, including payment, royalties, property lines, and more.
Step 5: Learn How to Collect Royalties
Understanding how to invest in mineral rights is one thing, but there’s another layer to knowing how this investment makes money.
Many investments seem risky because there’s no guarantee they’ll pay off. I worried about losing money on mineral rights, so I started small and grew my investments over time. Doing all the research greatly increases your chances of investing in quality mineral rights that will pay royalties.
Like other investments, the owner can keep their rights and earn money over time or sell them for a lump sum. One benefit to mineral rights is that it’s possible to sell a percentage of the rights and keep some for profit.
That way, you get money for the sale of a portion of the rights as well as royalties when utility companies use that specific portion.
Just as owning an apartment building guarantees that rent checks come in every month, owning mineral rights can lead to recurring payments over time.
Unless the owner plans to mine the land, they usually lease it to utility companies. Those companies do all the work while the owner sits back and makes money.
It’s a good idea to create an initial lease agreement that lets the company analyze the land before extracting anything. Once they see the scope of the land’s minerals, they know what they want to extract from the soil and how to approach it.
At that point, offering a second lease agreement keeps everyone legally covered. It protects the company looking for minerals because they’ll be the only ones searching that area. It protects the owner because they didn’t get ripped off with the first lease.
If the first lease expires without the company doing anything, it’s null.
The company can also explore the land and decide against signing the second lease. Therefore, this two-step option truly protects everyone’s interests.
Mineral rights owners receive a set fee from the first lease, typically called a signing bonus. When the company later extracts the minerals, the owner is paid more in royalties, which vary depending on what the owner outlined on the lease.
Before selling mineral rights to make money, owners should refresh their research before buying them. It’s important to stay aware of what minerals are on the property.
Calculating the current value and tax rates also helps owners know where to set the asking price.
At this point, hiring a broker, as previously mentioned, is a safe step. Brokers are on the seller’s side and will get the highest price possible because their paychecks stay tied to the sale.
Mineral rights are a great investment, but eventually, the owner might want to sell them. They can sell some of the rights and keep a portion for financial security if they need money.
Owners can also pass their rights down to their children as inheritance. This is a good way to keep the rights in the family, especially if there’s never a good chance to sell them and get a great value for them.
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Step 6: Avoid These Mistakes
As with any investment, mineral rights involve risks. It’s important to be aware of possible price issues, ownership details, and demand.
Price
With mineral rights, the prices can plummet or soar seemingly on a whim. A contango market is when the futures price is higher than the current value, so brokers expect buyers to pay closer to the futures price. They want to make their money and believe that the buyer will turn a profit quickly, so the prices increase.
In general, this isn’t a terrible deal. The mineral usually appreciates appropriately and sometimes even surprises the buyer with how much it pays off.
But if the mineral doesn’t increase in value as projected, the buyer loses the money they were banking on. The broker already got their fee, and the owner got the sale price, but the buyer is at a loss.
Ownership
Oil and gas companies aren’t exempt from filing for bankruptcy. When this happens, people who own mineral rights miss out on royalty payments. If the company doesn’t exist anymore, they can’t pay. Getting money from the bankruptcy settlement is possible, but it’s not guaranteed.
Thankfully, owning mineral rights means the agreement with bankrupt companies is void. The owner can find a more profitable partner to continue making money.
Demand
There will always be a demand for most minerals because the world needs energy. Minerals used to make batteries are more in demand than in previous years before power sources started changing. Energy sources evolve constantly. Staying informed about this process ensures the owner’s mineral rights remain valued.
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