Like diamonds, basis is forever (though tenancy may change).
Three weeks ago I listed it as the third number I look at in any proforma. This week, let's go deeper.
Here is the question: what would it cost to build this property from scratch today?
Land. Construction. Permits. Entitlements. Time. Add it all up. If that number is higher than what you are paying then you have a margin of safety built into your basis before you underwrite a single dollar of income.
That matters for one reason: new supply cannot come in and undercut you economically. A developer cannot build a competing asset cheaper than you bought yours. That is a moat.
This is one of the reasons we love IOS. To build new industrial outdoor storage near a port or a freeway interchange today, you need land (which is scarce in infill areas), heavy industrial zoning that takes years to permit, and construction costs that have risen significantly since 2020. The land and construction costs add up quickly, and we can sometimes find ourselves buying at or below replacement cost even in infill markets.
What replacement cost does not tell you: whether the tenant is creditworthy, whether the income is growing, or whether the market is healthy. It is one input, not the whole picture. There are many markets where IOS simply does not trade below replacement cost, it is a metric but not the only one.
What is the most underrated number you look at when evaluating downside risk?
Wednesday Real Estate 101: Replacement cost
