Pearls of Wisdom from Warren Buffett (Part 1)

“Price is what you pay, Value is what you get”

 Warren Buffett

 

Warren Buffett is commonly referred to as the most successful investor on the planet and if you have been to a Nyko Property Information Evening, you would know that I am somewhat of a groupie!  While Warren Buffett has many fantastic quotes, there are two that especially ring true to us here at Nyko Property and we will be covering each of these in a blog over the next two fortnights.

In today’s blog we will be discussing his famous quote on value, “Price is what you pay, Value is what you get”. This is such an important clarification when it comes to buying any asset and especially property. Price and value are two very different things. Just because we pay a certain price for an asset, doesn’t mean that is what it is worth.

When buying investment property, especially new property, the value you pay for the asset goes a long way to determining whether it will be a successful investment.  Buying a great property, in a great location, that fits the demographic well should be enough to ensure the property performs. However, if you buy that property at the wrong price, all of those positives can be negated.

When this is explained, someone will inevitably say to me, ‘but if I hold the property for 10 or 20 years I won’t even notice if I overpaid for $20,000 or $30,000’.  While that may well be true, paying over the odds in the first instance not only reduces the return over time but more importantly significantly increases your risk.

After all, Real Estate is an illiquid asset. Meaning that when you want to sell, it can take months to find a buyer and settle plus it is costly to exit. There is the stamp duty you initially paid, agent’s fee’s, legal costs, capital gains tax and more.  Buying an investment property is not a decision you want to get wrong.

This is especially true if you are forced to sell within the first couple of years of ownership. Nobody ever thinks they will be forced to sell but things can change quickly in life and you want to make sure you are in the best possible position should this occur. This is when it is most important to have bought at the right price.

These reasons are why, at Nyko Property, we place such a high significance on providing independent valuations from top tier valuation firms to set the prices on all our projects.  While our research has changed and significantly improved over the last 9 years (where has the time gone!) this is something that we have always insisted on.

We believe enlisting an independent valuer to price the properties is the only way to fairly set the prices on a property without the clouded judgement from self-interest that an agent or the vendor may have. This is especially true for new property, which is much harder to price.

When a valuation is conducted on a new project, it is a conservative estimate as if complete at the time of assessment – not a guess on what it would be worth when construction completes in 6 or 12 months.  And as an investor, that is the best you can hope for. Buying a quality property at a fair price.

Thank you very much for taking the time out to read this blog. Next fortnight we will have the second instalment of the Warren Buffett pearls of wisdom blogs, with a discussion on what types of companies (property for us) Warren recommends people invests in.

To view this fortnight’s VLOG on youtube click here.

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