Don’t Overpay for Real Estate

Isn’t real estate fun? While the commercial and investment marketplace continues to trudge along without much hype and hoopla, the residential marketplace continues to make headlines. Today for example you’ll see the headlines “Stocks tumble on concerns over lenders.” and “U.S. Foreclosures soar.” I find it amusing that generally intelligent people seem to be surprised by these turn of events. They wouldn’t if they would just give it a little thought.

For months we heard about outrageous appreciation in prices, we learned of appraisers who inflate their values to justify the demands of real estate licensees and lenders. We see wild speculation in virtually every market in the nation. However, … we don’t see the population base increasing fast enough to absorb all the building going on and we don’t see incomes increasing fast enough to meet the demands of the higher mortgage amounts. Most people are like race horses, running with blinders on, keeping all that is going on around them out of sight and therefore out of mind.

Too often the real estate business is based on the “One greater Fool” theory. It is common for one person to pay too much with the intent of making a profit when the at least “One greater Fool” comes along and pays even more. Unfortunately, this works more often than it should. The residential single-family market has always been an emotional and irrational market, and it will continue to be. That is why it is difficult to use this market as a long term profit-oriented basis for portfolio development. Yes, intelligent investors will continue to benefit from this market segment. But they must be wise when calculating their entry and exit.

On the other hand, proper and prudent purchasing in the investment marketplace is still generally based on the ability of a property to produce income. The property that produces the most income is inherently the most valuable. It will serve any investor well to be familiar with the economic factors of both the market and the properties in which they invest. If they approach the business wisely, doing their legwork and running the numbers, they should consistently buy real estate that will produce long term revenue and substantial secure profits. Intelligence, education and hard work will pay off. If you have and use those things, everything else will fall into place. You can and should just sit back and smile when the headlines scream doom and gloom while your properties are chugging along exactly as they should because you bought as a professional and not as the one greater fool. The best way to make sure you don’t loose money on real estate is to not pay too much in the first place.