When I buy, I look for a good asset, at a fair price, with built-in options that can create upside.
If you’re going to make superior returns then it will be due to an option embedded in the deal.
- Excess land gives the option to subdivide (Boulder 2010)
- Buying outside my “home” currency of US dollars gives the ability for international arbitrage (New Zealand 2001)
- Buy homes for less than their cost to build (Tucson 2010)
The goal is not having a property that you would be proud to show off to your friends. Until recently, I owned a “pride” property. A 6,000 sq. ft home that earned my family nothing for the time we lived in it. Truly fantastic house, mediocre investment.
Likewise, the option should not be created by using a ton of leverage. High leverage is appropriate only when you’re using other people’s money in a non-recourse vehicle. More here.
When should you buy?
#1 – Buy when you need the asset. You rarely need the asset! Be patient.
#2 – Buy when the cost to own is FAR less than the cost to rent – see my free ebook for how to do this calculation.
#3 – Buy when banks are foreclosing – banks, governments and trustees often sell for less than fair value.
#4 – Buy when the local debt market has collapsed – a cash buyer in a liquidity crisis will receive favorable terms.
Note, these tips apply to every asset and you’re going to need substantial liquid assets to take advantage.
All of the above, imply that you should study your target market for a decade before you buy. I also recommend that you limit your equity investment to 15% of your family’s balance sheet.
Right now, we’re in a bull market and you probably feel like you will never get another chance to buy at distressed prices.
In my working life, I remember bear markets in 1990 (UK), 1997 (Asia), 2000 (US) and 2009 (Global).
Take your time and remember you don’t need to do the deal.
Once a decade, the patient investor will be sent a fat pitch.