Real Estate Risk and Return. It’s about time!
A successful real estate investor I met years ago mentioned a number of truisms, two of which have stuck with me all these years:
- You make money when you buy real estate, not when you sell, and
- Price volatility does not equal risk.
Let’s explore these further.
1. You make money when you buy real estate, not when you sell.
The first one is perhaps not too surprising. The clever truisms are often the simplest ones. Undoubtedly more important now than in the heady days of high inflation, buy your investment “right” and chances are good that you can sell it for a profit.
What has changed over the years however (Vancouver and Toronto house prices conveniently excluded) is that you can no longer count on price inflation to bail you out of unsound purchases (i.e. you paid too much!). Perhaps it’s timing, luck, negotiating skill, or a motivated vendor, but the benefit will be the same. Acquire the real estate asset at a competitive price; finance it appropriately (competitively priced debt fully serviced by arm’s length income); add value where possible ( property improvements, up-zoning, or re-tenanting are but a few examples); hang onto it for a reasonable length of time (see no. 2 below), and you’re employing a strategy which more often than not has proven to be very successful.
2. Price volatility does not equal risk.
The second truism is perhaps not as obvious, but worthy of consideration. Stocks, bonds, and real estate all have value (for our purposes, a “price”) which is prone to fluctuation. If a stock, purchased and trading at $100, falls to $1, then this may very well be a failed investment, and perhaps is the basis of a discussion on speculating vs. investing. But what if the price was 10% less today than it was a week ago when you bought it? Would you buy more? Understanding that there are many considerations of course, but if you said yes, you would be “dollar cost averaging”, which is a proven and sound investment strategy.
Does this hold for real estate as well? A major difference might be that real estate is not generally as liquid, and perhaps not prone to price changes as abrupt as other investments. You can be sure however, that there are shrewd property investors making strategic purchases in the U.K. property market, post Brexit property value meltdown. Similarly, Warren Buffett famously said that he would buy “a couple hundred thousand houses“ if there was a practical way to do so, post U.S. housing market collapse, in 2012 (see story here). The unknown variable is of course your personal investment goals, and your time horizon. Both investment decisions were based on the premise that real estate, for various reasons, is essentially a sound investment. People will continue to need roofs over the heads. Companies will continue to need an address from which to conduct business.
Both truisms are interesting, and in the final analysis, may in fact be flip-sides of the same coin. Greedy? Not especially. Opportunistic? You bet!
See value where others do not. Add value where others can not. Finance your acquisition appropriately, and enjoy the ride. It’s all about time!