Investing in mineral rights gave me a chance to make money without having to do any work or maintenance. While it might sound like a get-rich-quick scheme, investing in mineral rights is a complicated process.
I needed to understand the types of mineral rights and how they can pay off. There was also a lot to research before I decided what mineral rights to buy. The purchase isn’t as simple as buying stock, so I wanted to understand everything it 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.
It’s also possible to invest money in mineral rights, as I did. After learning how to invest in mineral rights, I wanted to share my experience with you. It’s a great way to keep your money secure and potentially get a big payoff down the line.
Table of Contents
- What You Need to Know Before Investing in Mineral Rights
- Types of Mineral Rights
- Mineral Interest
- Royalty Interest
- Overriding Royalty Interest
- Working Interest
- Non-Operated Working Interest
- How to Invest in Mineral Rights in Steps
- Step 1: Find Out Which Minerals Are Lucrative
- Step 2: See What Is Available to Purchase
- Step 3: Buy the Mineral Rights
- Step 4: Transfer Ownership
- Step 5: Learn How to Collect Royalties
- Step 6: Avoid These Mistakes
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 some 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 own mineral rights completely. 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 piece of 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 want to look into who owns the mineral rights as well.
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 each of these six types of mineral rights. They all have pros and cons depending on what you want to get out of your investment.
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. If anyone wants to drill into the land, they have to get permission from the owner and pay them accordingly.
Mineral interest rights give the owner the full ability 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.
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 expenses to pay upfront, like drilling or creating a well in 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 as long as there’s enough land and no overlap in minerals they’re searching for.
The paperwork for these agreements needs to carefully outline what land each company can mine. That way there won’t be any disruptions or legal problems.
It’s possible to get different royalty percentages from this type of 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 minerals found underground. The percentage refers to the entire land, and the company only drilled into a few square feet to find the minerals. Therefore, they divide that percentage by the land they ended up accessing.
Overriding Royalty Interest
Overriding royalty interest has some limits that mineral interest and royalty interest don’t. The owner only gets royalties while production is going on in the specific land area.
Once there is no more work on that property, the mineral rights lease expires and the owner has no entitlement to the land or money.
There are some stipulations to selling an overriding royalty interest once the owner decides to move on. 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 make money 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.
Like mineral interest, working interest gives the owner the ability to explore minerals in the land area you own. The owner can develop and produce them as well. But since a utility lease granted this permission, there are some restrictions.
This type of mineral right is the only one where the owner has to pay expenses.
These charges can relate to drilling into the land, operating a well, and more. This can be costly if the owner of the mineral rights is the one drilling underground.
However, working interest is favorable if the owner leases the mineral rights to a utility company.
Then the company pays all expenses related to accessing the minerals in the soil. About 20% of the revenue counts as 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 yet 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 interest 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 pass 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 what the owner is looking for. 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 if they don’t find anything, the mineral rights owner won’t get paid.
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 didn’t get any compensation, which is disappointing.
On the other hand, if the owner inherited net profits interest mineral rights, they haven’t put any money in at all.
Therefore, they’ll only benefit from anything found on the land. And they might win big, depending on what the company finds. And since the owner isn’t liable for any losses, they only stand a chance of making money, not losing anything.
See Related: Best Solar Energy Stocks
How to Invest in Mineral Rights in Steps
Step 1: Find Out Which Minerals Are Lucrative
To get started with mineral rights research, I had to find out which minerals were lucrative. It’s possible to invest in mineral rights and have nothing pay off, 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 just 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 of my attention on this outlet.
The goals can be any type of 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 make that return on investment (ROI) back 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 have an idea of 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:
- oil and gas
Not all states have oil and gas reserves. In the United States, 10 states hold about 80% of the total reserves:
- North Dakota
- New Mexico
Other minerals are valuable, and many have prices that are increasing 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. In time, manufacturers are going to greatly increase battery production.
While I was 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 for what reasons. It also 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 weren’t 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 I was researching what each state classified as minerals, I also found information about mineral rights in each state’s laws. In some states, fracking is legal, but other states 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 at the same time. The knowledge helped me make decisions when it came to my investments.
See Related: Best States for Real Estate Investing
Step 2: See What Is Available to Purchase
In my research, I found some areas that were 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 I could about each parcel of land.
First, I found the legal description of the property.
That is, I looked up the property according to the address on the county property assessor’s page. When I was searching for undeveloped land without an address, I clicked around 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 knew I had the right location.
On the agency’s GIS, I accessed the Public Land Survey System (PLSS).
From there I was able to see the minerals, wells, and other activity on that parcel of land. Better yet, I could see the information for the surrounding property without having to complete another search from square one.
I took all the information from the oil and gas agency and put it into a spreadsheet so I could see all my research. I was looking for land with lots of potential for payoff, so I wanted to make sure I had everything I needed.
After completing this process for several parcels of land, I could compare and contrast data easily.
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 in 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. The next step is, naturally, 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.
It’s one thing to invest your own money in the stock market or a startup venture, 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 make sure I could extract any minerals found in the land, without limits. I always wanted to know what I’d have to do when it came to preventing 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 also knew that I had to repair any land damage on my own, so I knew to adjust my profit margin accordingly.
The owner isn’t the only one who needs to agree to the terms of the mineral rights. 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 on my own because I didn’t know enough about mineral rights at the time.
I know more now, but I don’t regret using an attorney who had experience in the sale and transfer of mineral rights. They were diplomatic and explained everything so I knew what I was getting and felt empowered during the sale.
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 was looking at mineral rights through auctions, it seemed way too easy to get ripped off. There were listings for rights that wouldn’t pay off for more than 50 years.
However, it’s also possible to find high-quality mineral rights going for reasonable prices. 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 looked at my financial records. This happened before I had a chance to bid on anything. They want to make sure that 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 and work out a deal. It’s possible to negotiate a good price from an auction, even if you’re not the winner.
If the mineral rights are part of public land, then the government holds the auction. 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.
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 they’re working with the seller’s profit in mind. They want to get the highest price for mineral rights because then they earn more as well.
Going through a broker isn’t always a bad idea for a buyer, though. 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 you’re buying a house because you ask for certain things you want, but you might pay a bit more for it.
Most mineral rights sales are private matters since someone owns the land and is selling the rights. Unfortunately, most private sales are never advertised because the rights sell directly from person to person.
I was able to find a private sale, so I was able to get 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 at getting a good deal.
Interacting with the seller can make compromising much easier than going through a broker or auction.
See Related: Best Nuclear Stocks to Invest in Today
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 encompass the physical property as well if the owner sold both of them together.
But for buying mineral rights only, there’s a separate deed that outlines what exactly it covers. It will also outline any 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. This includes 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 then grew my investments over time. Doing all the research greatly increases your chances of investing in quality mineral rights that will pay royalties.
As with 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 themselves, 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 they extract anything. Once they see the scope of the land’s minerals, they know what they want to get out of 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 one searching that area. And 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.
It’s also possible for the company to explore the land and decide against signing the second lease. Therefore, this two-step option truly protects everyone’s interests.
Mineral rights owners will get a set fee from the first lease, typically called a signing bonus. When the company later extracts the minerals, the owner gets paid more in the form of royalties. These royalties vary depending on what the owner outlined on the lease.
Before selling mineral rights to make money, owners should refresh the research they did 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 side of the seller and will get the highest price possible because their paychecks stay tied to the sale.
Mineral rights are a great investment, but in time, the owner might want to sell their rights. If they need money, they can sell some of the rights and keep a portion for financial security.
Owners can also pass their rights down to their children as an inheritance. It’s 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.
See Related: What is a Wage Premium?
Step 6: Avoid These Mistakes
As with any investment, there are risks involved with mineral rights. It’s important to be aware of possible issues with price, details of ownership, and demand.
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 takes the buyer by surprise with how much it pays off.
But if the mineral doesn’t increase in value as projected, then the buyer loses 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.
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. It’s possible to get money from the bankruptcy settlement, 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.
There is always going to 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 keep their value.
- Ways to Invest in Cobalt Sustainably
- Best Renewable Stocks to Invest in Today
- Best Lithium Stocks to invest in Today
Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.