Wednesday, June 15, 2011

Warren Buffet's 'Moat Investment' Philosophy Holds Plenty Of Water

Bad play on words in that headline, isn't it? Because moats hold "back" water, right?

But the billionaire investor's thinking and strategy is sound -- it holds water. Buffet talks about "moat economics" and describes a moat as being that barrier of safety sorely needed as we weather this stormy economy.

So what is a moat investment? To be succinct, it is an investment -- in this case we are talking about commercial/investment real estate -- that has some barriers to entry that keep your competition at a minimum (there is no way to prevent competition), AND keep your principal and interest dry. Okay, now I'm really stretching the moat metaphor.

I will write even more simply: You work with your investment adviser, investment counselor, etc. (each of whom should be working with your investment real estate counselor, unless the latter wears the hats of the former) to carefully select and analyze commercial properties throwing off strong returns. Now, your risk level may differ from your neighbor or best friend. You might be okay with a strong cash-flow property that won't appreciate much, where your peer, friend or colleague may, in fact, be willing to accept a lesser cap rate in return for more stability and future appreciation.

The bottom line is you never know how the numbers will shake out until you perform the analysis. But those "moat" real estate investments are out there! If bought right, if analyzed correctly, if a strategy is in place and well thought-out five-year projection is established -- and it all makes sense, you will have some of the best protection you can imagine for your real estate.

Just like the guy in Vicksburg, Miss. who built a home-made moat around his house when the Mississippi River was well over its banks in the Deep South in May of this year. But he had the right idea -- he thought it out, he executed the plan well, and he stayed high and dry for some time.

Sometimes, there are projects with huge profit potential in the early stages. In these cases, capital is at a premium (critical, we might say) and the property developers may consider SIGNIFICANT discounts to early investors. But you won't know until you inquire or make an offer to get the conversation started. Geography can also serve as an econonic moat, with certain areas filled with expensive homes, expensive multifamily, and expensive high-end retail. At least in most cases. There is some risk, however. All you have to do is look at parts of Las Vegas or Collier County and Lee County in Florida and see places were upscale housing and retail were built, or construction started -- and remain idle and empty today.

Do your homework.

The opportunities out there are limitless right now. Interest rates are low and the inventory is high. But it is easy to get emotionally attached to a property, or sucked in to a deal that seems to good to be true. RUN THE NUMBERS! If you don't know how to conduct the analysis, consult with a seasoned commercial/investment real estate agent who knows what they're doing.

And finally. Quit trying to "steal" property. There are plenty of solid deals out there to be had. Waiting for the bargain of all bargains only delays your entry into the game, or prevents you from growing your portfolio sooner. So-called "steals" will come in their own time. I've written offers for serious, big-time investors whose M.O. is to throw a lot of stuff to the wall at a time and see what sticks. But they are players. The guys who are dipping their toes in the water and only want to commit larceny (figuratively, of course) their first time out . . . well, good luck to you. In my experience, these folks take their time and almost never get around to buying because the deal just isnt' good enough.

I know an agent here in northern Columbus who has a significant portfolio of apartments, and the buyer got what he wanted for loan terms from a solid lender. Read that again . . . he got what he wanted. But then he decided it wasn't enough. He is now shopping the loan among other lenders. Guess what? I'll be $100 he loses the apartments because he is trying to shave a fraction of a fraction of a fraction of a percent off the interest rate. Okay, I get that. But he is going to lose the deal if he isn't careful.

The "moat" properties are out there. Again, you can't entirely eliminate competition, but you can find properties that fit your economic goals. There will be many times when you need to act fast in order to snag the opportunity when it appears. But the more you put pencil to paper, the more properties you'll will find, and "the one" throwing off the results you want will emerge.

When Warren Buffet looks for real estate, he has gone on the record numerous times saying he looks for "moat" properties -- opportunities that boost his potential for profit.

A pretty smart guy in my book....

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