Bob Nelson, Bob Nelson, real estate investment broker, Pacwest Real Estate Investments, and Marcia Edwards, residential broker with Windermere Real Estate, examine timing of real estate transactions and when you really make your money.
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There are some common mistakes in real estate transactions and one big one has to do with timing. Market timing is everything: You really make your money when you purchase it, not when you sell it.
My dad used to say that what you buy and how you buy it dictates what you will later sell, and, of course, it’s when you sell that you see the profit that occurs. So if I have purchased a good property, I’m going to have something called a good property when I turn around and resell it. There’s going to be more than one person trying to buy it, and they’re going to up bid the offers that they make, and I’m going to be very satisfied that I made good choices in my acquisitions.
Of course, sometimes purchasing mistakes are made, and then those mistakes need to be absorbed. Let’s say you did not do a great job of negotiating, or you looked over something and said you’d absorb that problem, solve it during your ownership, and you did not. What do you have then for your sales side?
If you paid a little bit too much for a property, it’s much like buying the thing a year from now at the price that it would have been worth at that particular point in time. In that case, you are diluting your rate of return but as long as you are in an appreciating property, one that is going up in value, has appeal to tenants, and has appeal as far as maintenance and repair is concerned, then it’s an attractive asset. Maybe you paid too much for it, but at least you own the opportunity to make the excess profit that’s going to come as a result of all of those positive things that you overvalued and paid a little bit too much for. In essence, you observed it but offset it over time with benefits that made it worth it to you.
Rate of return is calculated on an annual basis, so in this case, you would have to say that your rate of return was very, very low in the first year, potentially even zero if you paid next year’s price for the property.
Something to consider in this situation is whether you could solve a problem during your ownership so that it’s not still an issue when you go to sell. Perhaps there isn’t laundry onsite or something else that’s a hurdle in renting, then if you solve that problem, it would make a difference.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
If you fix issues and increase the value and appeal, then that is one way to offset an overpayment.
The Impact of Timing in Real Estate Investing is from Bob Nelson and Marcia Edwards on the “Real Estate Today” Eugene, Oregon, radio show, which airs at 5:30pm daily on KPNW.