A common saying I hear in the equity markets is this: “Buy the position, not the return”
The idea is that every investment is a bet on the strength of the asset. When considering where to put your money, the value of the asset is more important than the return next week, next month, or next year. More than just value, you are buying into everything surrounding the investment.
In today’s market, bad returns scare investors from considering the position of an investment. For those stock traders out there trying to find the way in today’s market, there are great insights in this MarketWatch opinion article.
Warren Buffet, the Oracle of Omaha, popularized this approach to equities with his value investing strategy. Find an asset positioned for strong growth. Calculate the intrinsic value. Look for value even if the near-term returns look weak or meager. Strategize and hold for the long run. Value investing – seeking tangible, long-term value with careful strategy – is the key to a profitable real estate investment portfolio. And to prove it:
Let Me Tell You How to Succeed at Long Term Real Estate Investing
What do real estate investors consider when purchasing property? Equity multiples, internal rate of return (IRR), cash flow positive, property management track record, etc.
What should real estate investors consider when purchasing property? You are buying into a position, a landscape, a vision, and long-term value. You can see this clearly with the vision of Ray Kroc and other real estate magnates, who prized the location (and position) of the property.
Real estate is an illiquid investment that requires serious commitment. It’s a commitment of capital but also a commitment of you. This is daunting for some, exhilarating for others. Serious investors understand they are committing to care for an asset that is shaped by the market, by interest rates, by demand for space, by national and international investment, and by trust and good relationships. Understanding the many factors that surround a piece of property is critical to selecting the right investment.
So how do I avoid the ‘financials trap’ and position myself for steady, stable, long-term value? Three rules.
- Rule #1: Long-term goal-oriented investing over immediate cash flow, every time.
- Rule #2: Do the financial due diligence and then step back and consider the bigger picture.
- Rule #3: Expect the bumps – and always have a few alternate paths in mind.
As an example of these rules in practice, consider a dentist’s office. Let’s say a friend connected with you with an owner who is looking to sell his commercial office property that houses a well-known dentist. You run the numbers, speak to the owner, and chat briefly with the dentist. Everything looks good. You project a strong IRR and good equity multiple and look forward to owning office property with a good tenant. Ten years later the dentist left and the property was converted into boutique retail. Could you have planned for this? No, but preparing for demand changes, market changes, and tenant relocation enabled you to be ready for the opportunity.
