Do you know the difference between price and value?
Well you should… because the two principals are quite different and can make a big difference to your chances of achieving financial independence or freedom.
Wise words from the “Oracle of Omaha”
Warren Buffett is an American investor, industrialist, and philanthropist and is widely regarded as one of the most successful investors in the world.
He’s also referred to as the “Oracle of Omaha” because of his astounding investment success.
One of his most famous quotes (and he has quite a few!) is:
“Price is what you pay, value, is what you get”.
But do you understand what he means by that and how you can use it within a property investment context?
Price vs. value
The fact of the matter, whether it is shares or property, is that there is a significant difference between price and value.
But if we look at property specifically, you can clearly see how value differs from the price of a property when one property grows in value at a far greater rate than another.
For instance, you can choose a lot of apartments to buy for, say, $600,000, but the value comes into the equation when measure it’s performance as an investment and in particular, itscapital growth over time.
Consider this: the majority of these properties will be average capital growth performers; some will be poor performers; and a small percentage will actually out-perform the market.
That’s how averages work!
In real-time results, for example, one apartment may be worth $700,000 in five years, while another may be worth $1 million.
Quite simply, that’s where the difference between price and value truly lies.
I only ever invest in investment grade real estate, because I understand that it’s worth paying a premium for a property that’s more likely to outperform the market averages in the future.
But, in my experience, far too many people get bogged down on the purchase price and forget the bigger picture, which is how that property will perform in the years ahead.
Of course, this is where a “bargain” mentality can be dangerous because a cheap or inferior property will likely always remain that way.
Often because it is in a secondary location.
When investing in property, it’s vitally important to follow a proven strategic formula which will enable you to achieve the best results over the long-term.
So, it’s not so much about the price you pay today (although you don’t want to overpay) but what price you can achieve in the future because that property has increased in value.
Its value has outperformed the averages because it’s in the right location, it’s the right type of dwelling, and it appeals to the right type of people (usually owner occupiers) who are likely to pay the most for the opportunity of owning it.
That’s why value beats price any day of the week, month, or year.