I became interested in buying real estate when I was quite young. I have always enjoyed investments that I could touch, see, and even walk across. Throughout my life as a financial advisor I have encouraged my clients to hold a portion of their investments in some form of real estate. When I began looking for properties early on, my Dad taught me the three rules of real estate that I am sure everyone has heard. Location, location and location. I have never appreciated that principle more than I did after a recent visit to the beach.
Our family owns a condo in Dana Point, California. Next to our Condo complex is a small city park that looks down on the beautiful Strands Beach which is only a short walk down a few flights of stairs. Along the way we walk through a Cliffside neighborhood of quarter acre lots, terraced into three levels. Each level has a beautiful view of the beach, the ocean and Catalina Island with the only difference being its closeness to the sand. The lowest level sits on the sand. The second level is about 100 feet up the hill and the top level is another 100 feet higher.
Since all the lots lie in the same gated community, and are essentially the same lots with the same beautiful views, I assumed they would be priced reasonably the same. I decided to do some checking and in so doing, learned the true meaning of the three rules of real estate. I found that the third level of lots were offered for $8 million each. The second tier of lots were priced at $18 million apiece. I was flabbergasted that an extra 100 feet, with all else being the same, would increase the price by a whopping $10 million. When I asked about the first level beachfront lots I could not believe it when I was told $33 Million.
These lots below our condo have equal beautiful views, equal smell of fresh ocean air, equal sound of waves breaking on the sand, and equal use of the luxury common areas in a ritzy gated community. But they are not equal in one thing – only the first row sits on the sand. It is a very small difference, just 200 feet, but it makes all the difference in value. It should be no surprise that those expensive beachfront lots are selling the fastest.
The principles that apply to real estate can also apply to other types of investments. With businesses there are various tiers of companies within any given industry. Investors looking for a bargain are often drawn to second and third tier products. They have a difficult time understanding why one company’s stock sells for so much more than another when they appear to be similar on paper. They look at P/E ratios or book values and often make the mistake of thinking that everything else is equal. But everything else is never equal. And it is in those sometimes small areas where things are not equal, that the best investment opportunities might often lie.