Investment Strategy Overview
Like the stock market value investing philosophy originally espoused by Graham and Dodd in 1934 (Security Analysis, First Edition), the path to building wealth in real estate is an open secret and has been widely known for a long time. Both strategies rely on several common elements:
Detailed investment analysis to determine an intrinsic asset value
Purchasing of assets at a discount to market value that establishes a margin of safety
Reliance on the power of long-term compounding of returns
Value investing is frequently referenced and infrequently practiced
because most individual investors in both the securities and real
estate markets lack the required discipline and patience. When real
estate is popular and properties are selling at ultra-low cap rates
that aren't justified by current rental rates, the disciplined investor
may have to refrain from buying even
high-quality properties, sometimes for a significant period of time.
Properties acquired at low cap rates often
produce sub-par returns because future rent increases are not a
certainty. Remember that a cap rate is roughly comparable
to an EBITDA multiple in the stock market. Paying a cap rate of 5 is
like paying 20 times operating cash flow for a company’s stock. That is
an awfully high priced stock.
Investors also claim to be long-term oriented but if the strategy is
“not working” or “not showing results” they abandon it. Income property
experiences long-term gains that are driven by incremental increases
in cash flow; slow but steady price appreciation over a long-time
horizon; and a
declining mortgage balance.