There are no bad assets

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I love Quora, the question and answer site. But, multiple times per day, people post questions like “Is buying an apartment building a good investment?” or “Should I buy stock?” or whatever.

These are dumb questions, because whether an asset is good to buy is 100% determined by the price.

For example: Imagine a run-down buildingon a street with lots of other beat-up buildings. Is this something you should buy?

Maybe… it all comes down to price. If that old building is generating, say, $100k / year in rent and you can pick it up for $600k (eg 6x GRM), then it might be a great asset to buy. At $1.3MM (13x) it’s probably an idiotic move.

Ah, you say, but what about assets with real problems, like environmental or structural or legal issues?

Those can be great assets, too, so long as the buyer does enough diligence to be properly informed about the costs / risks involved and pays a price which reflects those costs and risks.

For example: Say you find a commercial building that would ordinarily be worth $1MM, if it weren’t for the gas tanks buried under the property which are scaring off lenders (who generally hate environmental risk). Maybe you find out you can buy the thing for $600k, cash.

Maybe you can (with help from pros) get comfortable that the cost of removing the tanks and remediating any related soil issues will be in the range of $100k. Well, that’s probably a pretty great asset to buy, since you can be all in around $700k on a $1MM asset – a return of 43%. And even if you’re off, and the work ends up costing $200k, you’re still all-in for $800k on a $1MM asset – a return of 25%.

So, say it with me: There are no bad assets, only bad prices.

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