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 multifamily properties are selling at cap rates of 4-5, the disciplined investor may have to refrain from buying even high-quality properties, often for a significant period of time. Properties acquired at those low cap rates are almost guaranteed to produce sub-par returns. 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. Not many companies grow at a rate fast enough to justify that kind of high price and few properties can increase rental rates and cash flow growth that fast either.
Investors also claim to be long-term oriented but if the strategy is “not working” or “not showing results” (often requiring a 10-15% return) within 12-24 months, they abandon it. Any normalized (non-distressed) real estate market that is showing that kind of appreciation is most likely headed for a hard fall.