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November 5, 1988

How to Invest in Real Estate

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model plucking dollar off of money tree

Photo Credit: Karin Catt

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Although buying a home may turn into a profitable investment, most home buyers aren’t primarily interested in earning a profit. Naturally, they want to get the best bang for their buck, and maybe someday sell it for more than they invested, but mostly they’re looking for that indefinable something that flicks a switch in their sentiments and turns brick and mortar into a multiroom womb where they and their families can live in peace and love, and be happy forever and ever, amen.

Real estate investors are a different breed.

Oh, sure, most of them also have warm, comfortable homes brimming with family, friends, and good cheer. But cozy feelings have no more to do with their real estate investments than with their stock portfolios or Certificates of Deposit. Which is exactly as it should be.

There’s something else that’s different about real estate investors. They know more than most of us, including the fact that the most widely accepted verity about real estate — you know the one: “The key to real estate investing is location, location, location” — is bunk. Bunk, bunk.

Location? Location? Location?
Location is certainly a factor in determining property value, but a profitable transaction is determined by cash flow or equity.

(Equity is the difference between the value of a property and the amount invested. Cash flow refers to residual or passive income. Successful real estate investors always use those two factors as their measuring stick.)

And while novice investors are battling for deals in the latest trendy areas, savvy entrepreneurs are usually acquiring profitable properties far from those newly chic areas.

Buy Low, Sell Low, and Do It Often
Almost as universally accepted as the “location, location, location” maxim is this one: “Buy low. Sell high.” But successful real estate investors preach a different credo: “Buy low, sell low, and do it often.”

You see, they know that a too-high asking price turns away potential buyers while incurring carrying costs such as taxes, insurance, and liability. Far better to price a property reasonably, to make an acceptable profit, and to do it over and over again.

Obviously discounted property sells faster, so you can actually make more on a deal by avoiding those carrying costs than by pricing it too high and having it languish on the market.

As tycoon Bernard Baruch said, “I made my money by selling too soon.” Moreover, by leaving profit on the table for the next person, and being fair with others, you create a good reputation that encourages repeat buyers.


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