One Idea

Seven years as an ERP systems analyst for one of the Big 4 firms. Now working in public sector for a school district doing same. I work between the customer and the software engineers. Remember the guy from the movie Office Space that says "...I have people skills..." in his interview with the consultants? That's totally me. Started investing in real estate 12 years ago. This was a great decision but I'm now tired of fixing toilets on weekends. I really enjoy pouring through mountains of data to find something very few others will see or understand. I'll spend weeks, even months, working for one "ah ha" moment. I think that regardless of your background (engineer or otherwise) this is an important trait to have.

Thanks for the input. And thanks to JBird for putting the Buffett statement into context. I found this link that aggregates some of his statements about the 50% return … http://valuevista.blogspot.com/2007/06/warren-buffett-50-returns.html What I thought was interesting was that he researched every company in Moody’s early on in his career. He would recommend the same to any manager starting out with a small amount of capital, saying that the “bank of knowledge” would do him or her terrific good over time. Just goes to show that, although 50% returns with small sums is possible, few will do the work required to uncover the opportunities. It's probably less about being smarter than the competition and more about outworking them.

Two of Buffett’s claims that seem to contradict each other: 1) He has said openly that if he were starting with a small portfolio of < 10M, he could GUARANTEE 50% returns. 2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets. This is the message we hear over and over. If you take these two statements at face value, it’s seems that most of us should be focusing entirely on small/micro cap net-net companies <100M. But then what did he do differently than Ben Graham and Walter Schloss who devoted their lives to the net-net and “only” averaged around 20% over their careers? What I’m really wondering is if it is possible to guarantee 50% returns doing ONLY net-nets, or is there something he’s not telling us? Would WB be buying BAC warrants and other derivatives? It seems like he would have to venture into special situation investing to get these returns. But then that conclusion contradicts the spirit in which he made these claims. Is the answer a concentrated portfolio of net-nets? Or are we just kidding ourselves to think he wouldn't be investing along-side Ericopoly?

Real estate can be a great investment because of the leverage. You can buy a 2-4 unit building with 10-20% down (even less down if you go owner-occupied). If you buy in a coastal city, with strong rental demand, your property will probably appreciate faster than inflation. Between 1975 and 2013, we have seen 7% annual appreciation in the Los Angeles area. If you bought a 75K property in 1975, it is probably worth over 1M today. If you put 20% down, and realized 5% appreciation, that's about a 25% increase in equity each year. Other benefits include cash-flow, tax benefits, and principle reduction with each mortgage payment (all of which are less meaningful than the appreciation). The other thing that should interest value oriented investors is the highly durable nature of the assets you own. Demand will usually remain consistent or grow over time. In most coastal areas of the country, rental demand will continue to be strong 30 years from now. Also, your biggest expense (debt service) can remain fixed while your rental income increases each year. The worst part about owning rental properties is managing the tenants. Unless you have a background in law enforcement or debt collection, I suggest that you consider a good property manager. It's always a good idea to manage your first building for about a year or two just so that you get that experience under your belt.