In 1977, my wife, two-year-old son and I were living in the West African country of Nigeria.
I was working with on an assignment from my UK consultancy company. I was part of a team preparing the master plans for a new state capital city in Abeokuta, in Ogun State.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
It was about a four-month posting, so I moved the family from London to Nigeria for the duration.
It was in the early days of Nigeria’s oil boom. Money was being lavished on all sorts of projects around the country.
And amazingly, this posting provided the makings of an investment portfolio and investment philosophy that has carried with us ever since, and still does to this day.
You see, my assignment in Nigeria afforded us a comfortable life by standards of the day. We stayed in a hotel and received a weekly allowance to cover all our living costs, including travel.
On payday I’d receive a thick stack of naira (the local currency).
That would cover the hotel bills, food, and incidentals – and there was usually a wad of cash left over.
On top of that, my core consultancy fee, along with an overseas “hardship allowance,” was paid directly into my U.K. bank account.
It sat there, totally untouched and quietly building during our stay in Nigeria.
On our return to the U.K., there was tidy pile of cash in the account.
There was no way I could have accumulated this little pile living in London, paying its high rents and high living costs.
Investing this money
Our first thought was to use this cash to fund our entry into London’s now-growing property market.
Over a couple of months, we searched the Hampstead/Highgate/Swiss Cottage area of the city within close travel distance to my office in Hampstead in North London.
There was no shortage of housing on the market for sale.
It would have been easy to stretch our deposit (i.e., borrow more money) and buy something pricier. But I listened to my conservative streak and bought a more modest residential unit.
I had crunched numbers on servicing a mortgage at the interest rates at the time. I’d also run a few alternative scenarios with higher interest rates.
We could have reasonably afforded the down payment on a property twice the price of what we eventually bought. But I was worried about interest rates rising, and how that could increase our monthly mortgage payments.
I was right to be concerned
A couple of years later, interest rates soared, touching as high as 17 percent in late 1979. My monthly mortgage payment nearly doubled.
Our decision to go with a modest residence was looking better by the day. Servicing the mortgage on the more expensive upmarket places would have seriously strained our household budget.
Our flat was cheap. The decor (if it could even be dignified with that description) was awful. We spent months renovating the place. We converted the coal cellar into a kitchen, which freed up space for an additional bedroom. We planted a garden and installed a barbecue.
All was good. And all for a down payment of a little more than GBP1,000 at the time.
Big gains from a small investment
A few years down the road, I was given the opportunity to go to Hong Kong on a 6-9 month consultancy project.
We put our London flat on the market to rent, with a view that we could move back in on returning to the UK once our time in Hong Kong was up.
Well, that was in 1980… and we are still living in Hong Kong.
For more than 25 years, our little London ground floor flat was rented out. A couple of interim light renovation jobs were carried out. The annual rent we received was 125 percent of the total purchase price we had paid in 1978!
Looked at another way, one year’s rent represented an annual return of 1,400 percent on our original equity down payment.
But by the time we sold the apartment after about 27 years of ownership, the sales price was almost 200 times the amount of initial down payment that we had made back in 1978.
That equates to a compound annual return of a little over 20 percent. And I’m ignoring the rental income.
I like those kinds of numbers.
It’s very tough to find stocks that give you those kinds of returns over such a long period.
Of course, it’s impossible to generate those kinds of returns on every real estate investment.
But if there’s one thing I’ve learned about real estate, it’s that anyone can do it successfully. As the decades have passed, I’ve seen it first-hand. I’ve watched how my fortunes have diverged from others, just because of the decisions I made about real estate.
I’ve also seen how the advice I’ve given other people over the years about real estate has quite literally changed their lives.
But there are three things to keep in mind…
First, real estate is one of the few investments that ordinary people can make using other people’s money.
Most people who buy stocks, bonds or other assets usually pay for them in full. The vast majority of folks do not use leveraged investment products or margin accounts (which allow you to leverage up your stock purchases, for example).
But it’s a different story in property, and used wisely, leverage (i.e. debt) hugely amplifies your buying power and ultimately your wealth.
Second, real estate is ideally a long-term investment – and should be viewed as such.
It’s an investment that should allow you to sleep well at night through the inevitable market cycles.
Yes, short-term value-add opportunities do exist and I’ve done that plenty myself… but your starting point should be to buy and hold… forever.
Third, real estate that has been held for a long term probably has little to no debt on it.
This is why, even if you’re in your 50s buying investment property still makes sense.
A 20-year mortgage can be paid off by the time you’re 70… and then that rental income is just “free cash flow”. Because don’t for a second think the government will be there for you!
And at that stage in your life, you want inflation-adjusted cash flow more than capital appreciation. Real estate provides that.
I could go on… I’m just scratching the surface here, but let me summarise with this:
Real estate is likely the largest investment you’ll ever make, and the difference between getting it right and wrong can easily be the difference between a comfortable retirement and one where you struggle to make ends meet.
Keep this in mind if you’re planning to invest.
Article by Stansberry Churchouse