The Margin of Safety in Real Estate
Part of Graham’s is something that as a “safety margin”. This margin of safety refers to a “buffer” to protect against unexpected drops in the prices of shares and the loss of the value of the underlying assets behind the camp. This margin of safety by analysis of the actual value of the stock when the price for them. This is done by all the assets that are not counted in the event of liquidation, such as land, factories and other facilities. First, remove these assets, then divide the number of shares in what is left, the current assets. The quotient is what should the stock price, which is the actual value of the stock. Well, you do not want to pay more than this price. But this is where the margin of safety concept comes in. You do not want to buy at this price or even slightly below, but you want to buy much less. Buy it at least sixty-six percent or less than the value it should be. This thirty-four percent difference is your margin of safety. These thirty-four percent is a buffer, since the price can fall substantially before any actual loss.
How does it work for real estate? Unfortunately, there is not a Benjamin Graham for real estate. But that does not mean that the principles do not exist. This applies to real estate. In the real estate investment, there is also a safety margin, which is just as important as the margin of safety investing in shares. Commercial real estate management teams and investors must be aware of this safety margin for purchases of offices or groups.
How, then, we find this margin of safety? We start out the new costs for the construction, is derived from the search for the new construction cost per square meter of similar buildings in the region and multiplying it by the number of square meters in the building. Then we have two possibilities. We can either something sixty-six percent below the cost of the house when the home is like new condition, or we can make the second method of determining the property. The first method is very unlikely to ever occur, although it sometimes also in events such as Foreclosure property and forfeited after tax liens. The second method is what most real estate investors should be. This includes the search for a building in need of repair and a good estimate of the repair costs. The sum of these two are the new cost of the home. Here, you want your calculated value of much less than the cost of newly built apartment. The sixty-six percent rule is still useful, but Real Estate has more wiggle room as a warehouse, so we recommend that investors with a fifty-percent rule in the examination of real estate. An investment is the smart and safe when every dollar you can at least doubled. In this way, if the value falls, you have a fat layer to protect it. More than likely, if the property value will not fall, and this “fat” is a piece of your next windfall.
So, the margin of safety in real estate is very real and very necessary. Just because it is not a book, such as security analysis for real estate, that does not mean that the principles do not exist and applies to real estate investors. Keep these principles into account when considering ownership and use. If you do this, you will be at the end to investments that have a high degree of safety and promise a high return.