Thursday, April 19, 2007

Is owning any real estate a good idea now? The difference between a well-calculated purchase and an average purchase.

I tend to trash real estate a lot, yet we still own and are even buying real estate, so what gives?

The basic answer is that the average house in the market is something completely different than the single best deal in the market.

So while we sold all but one of our properties in 2005/early 2006, that reflected that the price we could get for all of them was greater than what we valued them at (even taking transaction costs into account). Without really changing our minds on the future of the market direction, we then bought an additional 7 a year or two later, but why?

The short answer is that they have very strong cash flow, or rental income in excess of costs. This single barometer is probably the best indicator of whether you should buy a house. It is quite robust as well, and applies to a lot of situations. You need to make adjustments (by answering questions such as is this high rent sustainable, or can these low rents be raised, and what kind of one-time costs will there be?). If you do those and you're still doing well enough with cash flow (as with our recent purchase of 6 houses on Park St. in Tucson), there is plenty of protection from any potential blips in the market.

So while overall REITs (real estate you can buy on the stock market) are not a good value, if you know enough about the market you can still do well as a small property holder. Just don't buy a bunch of REITs or average houses.


Blogger Eric Wu said...

Your link at the bottom is not working.

4:14 AM  

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