What Happens When Elon Musk Tweets a Broken-Heart Emoji?
Nothing.
Absolutely nothing.
Nothing happens when Elon Musk tweets a broken-heart emoji.
Or a diamond hands emoji.
Or any other emoji.
If you’re a commercial real estate investor that is.
Though this feels like old news already, nobody in the commercial real estate business gives a rip what Elon Musk (or any other influencer) thinks or says or tweets about their commercial real estate assets.
Because real estate is a real asset. (It is appropriately named.)
The value of your commercial real estate is based on real laws and real math. The law of supply and demand. And a powerful math formula. Perhaps the most important formula on the planet for you (if you’re into expanding your true wealth). More on math in a moment.
True Wealth Defined
Let’s start with my statement about true wealth. What is that anyway? True wealth, in my mind, is an asset that produces income.
Sure, you may chalk up your neighbor’s Maserati and his shiny boat as signs of true wealth. And they may indeed provide true wealth. For his banker.
Last time I talked about the power of expanding your fortune by borrowing with fixed rate debt during inflationary periods. And it’s true.
But I was speaking of using debt for good assets. Assets that produce cash flow.
Not bad assets. Depreciating assets like cars and boats and clothes. These don’t expand your financial future.
True wealth consists of true investments. And true investments throw off cash.
So why did Musk’s tweets devastate Bitcoin?
Because cryptocurrency alone is not true wealth (IMHO). Crypto prices are based on the value buyers and sellers assign to it. And that value is not tied to any cash flow or real fundamentals.
That’s why it’s speculative. Speculative investments are based on opinions. And fears. And tweets. And emojis. And memes.
That doesn’t mean it’s bad. (I have some.) It’s just not in the same class as real estate.
“But crypto is more exciting!”
I must agree with you on that point. It can provide a rush for sure. My daughter bought some Bitcoin a few weeks ago and she started checking her phone for the price about every five minutes. It can be exciting.
But is your goal excitement? Or creating true multi-generational wealth?
True investing is usually boring. For example, Warren Buffett’s life has consisted of decades of monotony. He’s lived a boring life.
A number of years ago, Jeff Bezos reportedly asked Warren Buffett: “Your investment thesis is so simple…you’re the second richest guy in the world, and it’s so simple. Why isn’t everyone just copying you?”
Buffett replied: “Because nobody wants to get rich slow.”
“Investing should be like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas.”
Investing vs. Speculating
Investing is when your principal is generally safe, and you have a chance to make a return.
Speculating is when your principal is not at all safe, and you have a chance to make a return.
Speculation is more prone to opinions and tweets and emojis and headlines. CEO scandals, the mood on Wall Street, and rumors of war in the Middle East can quickly impact more speculative investments.
Real estate investing is certainly not completely immune to those factors. But it’s more likely to be a reliable store of value with potential for appreciation. And a predicable income generator. A creator of true wealth.
The Commercial Real Estate Value Formula
Your parents told you to pay attention in math class, right? Maybe this is what they were thinking about.
The value of commercial real estate is calculated by a powerful math formula. My favorite math formula on the planet, and one I’d recommend for your consideration, too. Here it is:
Value = Net Operating Income ÷ Cap Rate
I like residential real estate, and I think it will continue to appreciate in this inflationary cycle. But its value is based on comps. Comparable properties in the neighborhood. This formula is one of several reasons I abandoned residential investing in favor of commercial.
Commercial real estate values can be elevated by forcing appreciation. Forcing appreciation means taking actions to increase the Net Operating Income (NOI). And in rarer cases, compress the cap rates.
This is about finding deals with intrinsic value that exceeds the extrinsic value (the price) then unlocking that value for the benefit of investors.
And great commercial syndicators know how to locate deals with hidden intrinsic value. Latent value that is locked up in the asset. Potential value that is realized only in the hands of a skilled craftsman. Real value that throws off cash to investors without selling it…and later allows investors to enjoy the fruits of compounded growth at the time of sale.
That’s the type of people I love to invest with. How about you?
Even the great Elon Musk can’t destroy the wealth created by an effective commercial real estate syndicator. Back at ‘ya, Elon!
Important Note: I borrowed the headline and opening paragraphs for this post with permission from my friend and fellow commercial real estate investor, Jonathan Twombly.
If you have further questions, please email us at invest@wellingscapital.com or use this scheduling link to set up a call.
As with all financial matters, please do your own research, draw your own conclusions, and seek professional advice. The information contained in this article is for informational purposes only and is not intended to provide investment advice. Investors should consult their own tax, legal and accounting advisors before engaging in any transaction.