Tag: investing in real estate

• Buy and hold

  I know that this is supposed to be a blog about building cities, but it’s also a blog about real estate and I have heard that people sometimes do things like invest in real estate. So here is a terrific memo by Howard Marks (of Oaktree Capital Management) about when to sell assets (and when not to sell assets). His overarching argument is that, most of the time, staying invested is ultimately the most important thing. But that it can be difficult to do.

  Here’s an excerpt:

  When you find an investment with the potential to compound over a long period, one of the hardest things is to be patient and maintain your position as long as doing so is warranted based on the prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of a new, seemingly more promising idea.

  Howard is talking about the stock market and his words of advice are particularly important in that context given how easy it is to be a “trader.” I can, so maybe I should. But the same lessons hold true for real estate, even though it is a less liquid asset. A lot of wealth has been generated over the years by those who simply bought well and held for the long term. One good decision and patience can go a long way.

  2022.01.13

• What I see as the fundamentals of real estate investing

  Earlier this week my father sent me this article containing an excerpt of Warren Buffet’s upcoming shareholder letter. His annual letter—which started in 1965—is well known in the investment community. And in many ways, it’s like his own annual blog, started well before anybody knew what a blog was. His letters are personal, genuine and engaging—just like a good blog should be.

  But for me, what was really interesting about the letter is that it provided a number of lessons about investing in real estate. Lessons which, in my view, really represent the fundamentals of the business. The way I think about it is that there are really 2 ways in which to make money as a real estate investor over the long term. You can develop/reposition real estate and/or you can collect rent.

  Develop/Reposition

  If you’re developing or repositioning real estate, it means you’re doing something to increase the value of the property. It could be by rezoning, building new, or through an aggressive leasing strategy. It’s whatever you believe will unlock additional value. Once you’ve done this, you then either sell the property or you move onto the 2nd way of making money in real estate.

  Collect Rent

  By collecting rent, I really mean that you’re buying yield. This means you’re saying to yourself:

  I can buy this property for $1,000,000 and the net operating income on it is $100,000 (per year). So that means I’m buying at a 10% cap rate (or return). 

  Or maybe you’re saying:

  I can buy this property for $1,000,000, but the net operating income is only $25,000. However, the rents are well below market and I think I can easily get this thing up to a “10 cap.”

  Either way, you’re buying a stream of cash flows and you have an understanding of where that cash is going to come from.

  Speculate

  If on the other hand, you’re buying solely on the expectation that prices are destined to rise, you are—as Buffet points out in his letter—speculating. You’re not doing anything to create value and so you’re not developing. And if you’re counting on price growth to generate your investment returns, then you aren’t buying yield either.

  While many people have made large sums of money by speculating on real estate, I don’t consider myself capable of doing that in any sort of sustainable way. Hell, if Warren Buffet doesn’t think he can do that, why should I think I’m special.

  But some of you may disagree with this framework. If so, I’d love to hear from you in the comment section at the bottom of this post.

  2014.02.26