The Importance of Price and How to Stay in This Business Forever
Here’s a good quote from Barry Ritholtz author of "Bailout Nation.†I’ve never read the book, but I like what he had to say about this: Always remember that price is the most important aspect of an investment. Today we keep hearing people talk about "toxic paper" on bank balance sheets. Well, it's toxic to the banks because they paid 100¢ on the dollar for it. To somebody who gets to buy it at 30¢ or 40¢ on the dollar, it's not toxic at all. So there is no such thing as a toxic asset. There's no such thing as a damaged property. There is only a bad price.â€
Now, I’ll go a little bit further and say there is only such thing as bad prices AND bad terms. That’s because as creative real estate investors we are primarily buying houses one of two ways. We are paying all cash (where the right price is crucial) or we are doing a subject-to or lease option deal where the terms are crucial. But like Barry mentioned above, most people ignore these facts and that’s why they say real estate investing is hard and why people all over the country are getting their homes foreclosed on. Here’s the secret of being successful in real estate over the long run: You have to adjust with the current market. During the boom 4 years ago you could literally buy properties at 80 cents on the dollar and wholesale them and make a ton of money. That’s because in a matter of 30 days the property would jump another 10 or 20 thousand dollars. But these days you must buy a property at least 65 cents on the dollar and we know that property values are barely increasing at all.
Also, when it comes to tenants, they are a lot pickier these days because they have more options. When the market was hot I could show a property that needed a lot of work and people would snatch it right up. But now, if the property doesn’t have new paint and carpet it might sit vacant for weeks.
In fact, adjusting to the current market has to do with simply listening to your customers who are sellers and tenants. The worst thing you can ever do as an investor is think you are smarter than the market (I’m about to tell you how I know). When the market first turned I was being stubborn and I didn’t want to put in new carpet in a subject-to deal I had just picked up. It was a beautiful townhouse and everything was in perfect condition except the carpet. And when tenants would walk through the place they would comment how much they liked the house, but that it needed new carpet so they didn’t want to rent it. You would think that I got the clue early on, but I didn’t. After 3 weeks of hearing this I finally replaced the carpet and it rented out just a few days after that. The lesson I learned was to of course immediately listen to my customer.
So, since I kind of went off on two different directions with this article here’s the main points I want you to remember. Real estate investing will always be a profitable business and you can always make money if you buy at the right price and right terms. It doesn’t matter if we’re in a recession or not, there is always a way to make money.
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