Understanding price versus value when investing in real estate

How is your fantasy life?

Do you ever fantasize about being a movie star? A rock star maybe?

Me? Sometimes I fantasize that I am a famous investor. Someone to whom people listen and even quote. Someone witty and charming. Someone who makes billions and helps others do the same. Someone who has tens of millions to give away to fund important causes.

Warren Buffett fits into this picture. Perhaps the most iconic investor of our time, he’s a rarity in the Fortune 100. At number 5, Berkshire Hathaway is the only top ten company that doesn’t make or sell anything directly.


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Buffett and the company make their living by investing in the success of other companies. These companies are often subsidiaries, but their largest holdings are not. (Berkshire’s largest share of their top ten stocks is in Kraft Heinz, holding less than 27% of that company.)

I’ve got some good news for you: As a real estate investor, you and I have a real opportunity to invest like Buffett – actually more than most stock investors could ever dream of.

If you are a real estate investor and your fantasy is to invest like Buffett, there are some very real strategies that can get you there. Read moreā€¦

Price is what you pay – value is what you get

Buffett’s success is largely due to his ability to tell the difference between price and value. He learned this from his mentor, Benjamin Graham.

stock value vs price

Buffett disagrees with the Efficient market hypothesis. This hypothesis essentially states that everything that can be known about a company and a stock is known to a very broad cross-section of analysts and investors. As a result, there are no good deals. Every public stock is priced where it should be.

If you believe this (like me generally do), you won’t believe your Uber driver’s “hot tip” about underpriced. And you won’t fall for your drinking buddy’s logic that you all should buy Coors stock, because the price will go up once it gets to 80 degrees in Louisiana.

There are literally millions of eyeballs and billions of dollars worth of software analyzing this sort of thing. Trying to beat them is like trying to compete with Amazon.

So how does Mr. Buffett, armed with only a handheld calculator, beat the market, decade in and decade out? Not always, but certainly most of the time. Check out the scoreboard from 1964 to 2020:

  • S&P 500 total return: 23.454%
  • Berkshire Hathaway total return: 2.810.526%

Buffett, who has spent nearly all of his time reading and studying for more than seven decades, is a master at discovering intrinsic value in company valuations (stock prices). Intrinsic value (actual, potential value) exceeds extrinsic value.

How Buffett used intrinsic value to beat the market with Berkshire’s largest holding company: Apple

Buffett started buying Apple stock in 2016. This is surprising because he said he was ignorant of technology and thought it was too risky for Berkshire’s portfolio. He started buying at $27 a share and continued as the price ranged from about $20 to $40. By the end of 2018, he had amassed a billion shares.

This is why Buffett was attracted to Apple as an investment.

Investors misunderstood net asset value

The public worried about Apple’s ability to innovate without Steve Jobs at the helm. This concern caused investors to overlook intrinsic value indicators and kept the stock price low. Buffett likes to buy companies when they are “on sale.”

A temporarily low price, strong consumer brand and intelligent capital allocation were factors that led Buffett to believe the stock could be bought for less than its intrinsic value. In other words, the extrinsic value as determined by the market was significantly lower than the intrinsic (fair) value of the company.

In three years, the shares quadrupled in value and became by far Berkshire’s largest investment. This was important because Apple was already the world’s largest company (by market capitalization) when Buffett started buying shares in 2016.

Such a large rise in such a well-analyzed company indicated the market’s inability to accurately estimate long-term intrinsic value – and Buffett’s ability to do so.

Brand Loyalty

Warren Buffett also witnessed his grandchildren’s habitual use of multiple Apple products, their attachment to the brand through repeated phone and computer upgrades, and their willingness to pay more for Apple products. This behavior reminded Buffett of similar consumer behavior he had seen with prominent brands he already owned: Coca-Cola, See’s Candies and American Express.

Buffett was known for shunning technology companies. However, his expertise in consumer behavior through his decades of ownership of other favorite consumer brands allowed him to see Apple for its valuable intrinsic features. Others seemed to lack Apple’s ability to force customers to consistently pay a premium for its products and demonstrate brand loyalty through frequent repeat purchases.

Consumer behavior and brand affinity among Apple customers allowed Buffett to view Apple not as a technology company prone to obsolescence, but rather as a global premium consumer brand with consistent, predictable, high-margin buyer behavior.

Annual cash flow

In Apple, Buffett saw a company producing significant annual free cash flow, led by an intelligent capital allocator: Tim Cook. Cook smartly invested capital by buying back undervalued stocks and committing to a shareholder-friendly program to return significant capital to investors.

Applying Buffett’s Rules to Real Estate Investing

As an equity investor, it is quite difficult to find out unrealized net asset value. In real estate, it’s actually quite possible. This is because real estate is largely fragmented.

There are no millions of eyeballs analyzing the fourplex on the outskirts of town. There is no standardized cross-section of data comparing this mother-and-father-owned self-storage facility with thousands of others. That 90-year-old mobile home park owner who agreed to sell you with a handshake isn’t offering that property on the broad market with thousands of bidders.

You have an inside track, Mr. and Mrs. Real Estate Investor!

So how do you handle this?

Want to step into Buffett’s shoes by locating assets with hidden intrinsic value? Then start by thinking about the asset types where fragmentation plays the most important role.

  • These are typically assets owned by mothers and children.
  • They are often (but certainly not always) found off-market.
  • Sometimes they can be reused or repurposed. (Like the off-campus house that can be rented by the bed or the Kmart building that can be converted into self-storage.)
  • When run as mom-and-pops, they can often be upgraded by a professional. The increase in net income and value is often dramatic. (We have often seen a doubling or tripling of equity in less than five years.)
  • Sometimes just adding professional marketing, such as a website, can significantly increase sales and value.

A Brief Example: Rising Net Operating Income (NOI)

We work closely with an operational partner who has built his business largely on Buffett’s principles. He has a large acquisition team that relentlessly scours the country in search of off-market self-storage and mobile home park deals.

In the fall of 2018, this partner acquired a storage facility in Colorado for $4.3 million. The property had over 700 units plus RV parking. Our partner acquired it at a maximum rate of 10% with serious backlog issues (80%), rents and occupancy rates below market price, poor customer service and deferred maintenance. The expenses got out of hand, as did the books.

Our operational partner quickly took drastic measures to improve operations and upgrade the facility. This included:

  • Reducing delinquency from 80% to 5%
  • Increase occupancy rate from 78% to 86%
  • Increase rents to market level
  • Recruiting and training new staff on site
  • Rebranding the facility and correcting deferred maintenance
  • Add U-Haul, which increased revenue and increase occupancy
  • Building an effective online marketing presence

Improvements and operational refinements resulted in a $111,000 increase in NOI within the first year; this translates into an appreciation of $1,700,000 at a cap rate of 6.5%. The asset will generate $260,000 in free cash flow (after paying off debt and expenses), resulting in a 21% cash-on-cash return for investors.

Think about this: This project used ~$3 million in debt and ~$1.5 million in equity. If the property is sold, the investors would enjoy more than 100% return on their equity if the property were sold.

seeing is possible to invest like Buffett in the real estate arena!

Even if you are not experienced enough to pull this off, you still have options. You could find an asset type that works for you and start on the track to gain that experience.

Or you can partner with or invest in operators with this skill and track record. That’s what I do, and I’m having the time of my life.

You and I may never see the fame and fortune of Mr. have buffet. But as real estate investors, I truly believe we are in a unique position to profitably extract intrinsic value from fragmented assets. And to help our tenants and investors with that.

That is very satisfying now.

Learn more about the basics of investing

Are you just starting your real estate journey? Then this section of the Pyjama People Blog might be just what you’re looking for. We have hundreds of articles designed to help newer investors launch their orbit investing careers. If you’re ready to introduce yourself to the real estate world, check out the articles below, which will provide information on everything from saving for your first purchase, finding the right real estate agent, to screening your first tenants. If you’re new to real estate investing, these articles written by experienced investors with decades of experience are just what you need! Oh, and for more discussions and introductions from other budding investors, it might be a good idea to join our Beginner Forum. This is a welcoming place where new investors can learn and formulate strategy while getting feedback from experienced investors and from each other.

Fundamentals of Real Estate Investing

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