Home » economics » Financial Figuring for Landlords: Real Estate Moats

Financial Figuring for Landlords: Real Estate Moats

9913148_s

A moat was a medieval form of security.  Just pull up the drawbridge and watch as your enemies fail to get across the water, or if they do, to scale the wall of your castle.  Although physical moats have no place in modern real estate (can you imagine the lawsuits?), an “economic moat” is Warren Buffett’s choice metaphor for what makes a business resistant to competition.  Real estate as a business has a few good economic moats.

First of all, it’s very expensive for a tenant to change their real estate provider.  This is called “high switching costs.”   Think about the search for a new apartment, giving notice, cleaning and repairing the apartment to get a security deposit returned, moving all that stuff, and unpacking it all on the other side.  This could take days, and if some of the security deposit is withheld or a moving company is hired, it could cost hundreds of dollars on top of that. This means that a rational consumer of rental housing will grudgingly accept any rent increase below their moving costs.  That’s good for your business.

The second moat is the potential to be the low cost provider.  A lot of real estate businesses are run suboptimally.  They’re saddled with high debt, old equipment, and bad rental agreements.  A business run with reasonable debt, reliable equipment, and good tenants (or else, good conflict negotiation mechanisms) can operate at a lower price than average.  This helps you get the best tenants and keep them, translating into lower turnover and lower vacancies, both good for business.

The third moat can be location.  Although I poo-poo’d it in my last column, saying that price mattered most of all, location can be a valuable intangible asset.  You might reasonably pay more to acquire a property on a public transportation route, for instance, because it makes your property more desirable to prospective tenants.  Once you have it, this kind of benefit is hard for competitors to replicate.

So the next time you think your rents are a bit low, or you paid too much for a property in a prime location, remember that these moats may be contributing to your economic success.  On the other hand, a little rent raise probably wouldn’t hurt, either.


Leave a comment

Your email address will not be published. Required fields are marked *

Follow Doug via Email

You can say you knew him before he was famous:

The up-and-coming landlord association for Massachusetts.