Wealth Growth or Wealth Preservation?

By Andrew Gaines

During the month of December, we were able to take a close look at three different properties in San Antonio.  We wrote offers on two of them and would have done so on the third, but it went at full price to another investor.  Of the two on which we made offers, one was awarded to another investor for a full-price cash offer and the other remains on the market awaiting a higher offer price than we were willing to make.  In all cases, we believed the asking prices were aggressive and could not be underwritten in a way that would provide the kind of returns needed to grow investor capital net of inflation and transaction costs.  This scenario is not unique to these three deals.  We have seen this several times over the last few months.  As an exercise, we underwrote these properties in various ways—lower leverage, all cash, varied rent growth assumptions, different investor return scenarios—to see what could work and to understand the possible perspective of other market players.    

It seems to be the case that there are at least two investor types looking at these properties in two different ways; those that are seeking wealth growth opportunities and those that are looking to preserve capital.  For those seeking growth, it is important to get a good value for the price paid.   That value can be unlocked during the ownership period and ultimately realized, but the total value must exceed the price paid plus other costs.  In other words, we want to acquire a property at some discount or with some untapped potential in order to grow wealth over time.  

For investors who are primarily interested in wealth preservation, a high rate of return on capital may not be required.  It is only necessary to keep up with the inflation rate plus costs to preserve purchasing power over time.  So, paying full price with no or low leverage could make sense because an annual total return in the low single digits might achieve that objective.  As compared to the volatility of the stock indices and their current, all-time high valuations a stable 4-5% per year from a fully renovated apartment building could be an attractive alternative.  

I think pursuing both wealth growth and preservation is also an option.  For example, when we think about what markets we want to be in, we are thinking from the perspective of wealth preservation.  Growing cities with diverse economies where incomes and job opportunities are above average are likely to be stable for years into the future.  That is where we want to invest to preserve our capital.  Markets like that should be resilient which should stabilize asset values within that market.  When we think about specific assets in those cities, we are thinking from the growth perspective.  We want to find a property that we can acquire at some discount or that has some value that can be unlocked.  Buying apartments with those features help us achieve our wealth growth objectives.   

Obviously, there is no right or wrong approach.  What suits each investor is what matters.  Where you are in the lifecycle of your wealth will inform your perspective as well as your view of the larger economy and a host of other factors.  We try to blend these concepts in our investment analysis, but that is not necessarily better.  Which of these is most important to you right now? Is it wealth growth or preservation?  Let us know by responding to the one-question survey below.  We would love to hear from you.