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(1/x) Few thoughts about replacement cost since it's been a bit of a hot topic here. Replacement cost is simply the cost at which you could rebuild an asset. Buying below replacement cost doesn't guarantee that you're going to make money, plenty of examples of that in retail...
(2/x) And buying above replacement cost doesn't mean that you're going to lose money, so long as your rents (and NOI) keep rising. However, keeping tabs on replacement cost is super important to protect your downside.
(3/x) It's particularly important if you're buying a "commodity" product, i.e. a select-service hotel, Class B-/C+ garden multi, stuff like that - things don't have a ton of land value or are not "category-killers" that are almost immune to competition
(4/x) Now why is that? It's because if you buy a Hilton Garden Inn in say, Wichita, at or above replacement cost and the deal works, guess what's going to happen? Four other select-service brands are going to get built right there and be able to undercut you w/better product.
(5/x) The thing to remember is that a cap rate is like a poll, it's a snapshot in time, it's not guaranteed and it can change. Particularly for asset classes w/shorter lease periods (apartments, self-storage, hotel).
(6/x) So if you're buying above replacement cost at a good cap rate, you better make sure that your product can handle competition because it will absolutely be facing it in 18-24 months.
