April 11th, 2009
Long Game - “value”
FUNDAMENTALS One question I always ask myself when I am purchasing a piece of property is “would I be happy (cash flow) owning this property over the next 30 years? ”. I get the question all the time (particularly in this environment) about value. Specifically the movement or variance in real estate values. The first thing I always ask the person asking me the question is “well…that depends on your definition of value”. “Value” could mean the sales price you derived from an end user (on a SFH for example) in a seller-distress scenario. “Value” could also mean the sum of all annual cash flows minus operating expenses and debt service plus tax advantages. It could also mean the “worth” of the property after 30 years when the tenant(s) have effectively purchased the property for the owner. Bottom line…if you have the ability to make a property cash flow and you protract the exit…then value takes on an entirely different meaning.
I think Mr. Buffets quote supports my thinking:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
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