Hi Don,

Thanks for the response! I understand that as general as the question was written, it is somewhat difficult to answer because you are right, real estate is local. Within a 100 mile radius, there could be over 50 different real estate markets, which I agree completely with you. Furthermore, the chance for a greater ROI can be achieved on a discounted property. However, an underlying reason of why I asked the question was to see what motivates people. Is it getting the "deal of a lifetime," making thousands overnight, or earning money from others hardships. In other words, are people more inclined to try and become Donald Trump overnight, or are they willing to stick it out for years to come.

I'm just curious to see what people have to say. All in all, I believe money can be made in real estate in many different fashions, including buying discounted property and by the buy and hold strategy. Although steady appreciation can be found as general in nature, to be more concise, I should have stated in the question if people would rather purchase real estate in linear type markets, not cyclical.

Again, thanks for the insightful information and the diligent response. Do you own investment property yourself?

Mon Mar 24 2008, 15:32

Personally, all other things being equal, I'd much rather purchase a home under market value, as opposed to a new home that offered "steady appreciation well into the future."

First, it's always debatable whether a home (new or otherwise) offers "steady appreciation." Lot of folks who bought in 2005, seeing the "steady appreciation" over the past 5+ years, were confident of continued steady appreciation. Instead, as we all know (and as commentor Hi loves to point out!), many homes depreciated. Sure, over the long term--20 years or more--there are statistics showing what a good investment real estate is. And it is. But those are big numbers--nationwide or at least regional--spread across multiple properties. Much of real estate is local, sometimes block by block. And it's no good saying, "Gee, the average appreciation over the past year was 10%" or even "The average depreciation was only 5%" when the value of your home has gone down 30%. So, few investors I know depend on appreciation. Think of it as the frosting on the cake.

Second, your question may presuppose that a home "bought under market price" won't appreciate like a new home. In the same general area, for the same general homes, a resale should track pretty well with the new homes. In some cases, the resale may outpace the appreciation of new homes.

What that means is that if you buy under market price, you've already got some equity build-up. And that means your return on investment is much higher if/when prices do appreciate. Here's a quick, crude, back-of-the-envelope calculation. Assume you have two properties. They're both worth $400,000. But you can buy one under-market for $350,000. You need to put 10% down to buy either one.

At the end of 10 years, with an annual compounded appreciate rate of 3% annually, each house will be worth $537,567. But because you were able to buy one for $350,000, your equity in that one (not counting any paydown of principle) is $222,567 ($537,567-$315,000). Your equity in the higher-priced house is $177,567. Your return on investment on the first home is 636%--or 63.6% annually--versus 444%--or 44.4% annually. Not bad in either case, but your return on the under-priced home is much higher.

Again, implicit in your question was the assumption that the underpriced home wouldn't appreciate as much. OK. Let's assume the new home appreciates at 3%, while the underpriced home appreciates just 2% from its real value of $400,000. At the end of 10 years, the underpriced home is worth a bit less than the new one. It's worth $516,842. Nevertheless, we received that immediate bump up in equity, and we only had to put $35,000 down. So our equity in the underpriced home is still higher: $201,842 versus $177,567. And our annual return on investment is still greater in the older home: 57.7% versus 44.4%.

You can play around with similar scenarios, and what you'll find is that the appreciation on the new home has to substantially outpace the appreciation on the underpriced home before the two ROIs begin approaching each other.

Hope that helps.

Mon Mar 24 2008, 15:03

wait, don't buy anything, too much uncertainty at this point.
would you buy YAHOO stock for $250 right now
I remember 2000-2001 crash/ recession
yep, some people bought it for $250, they didn't increase their wealth.

Mon Mar 24 2008, 14:14

Hi again Linda,

I have read Rich Dad, Poor Dad. I read it while in college. I have heard other people reference the Millionaire Next Door, and good information has come from it.

Those ideologies listed are exactly true, as my research has shown as well. However, knowing what it takes and doing it are completely different vehicles. Haha, I guess the wealthy are wealthy because they take the leap of faith, while others have not.

Thanks for the additional information, I think I'll stop by Barnes and Noble after work and pick up the Millionaire Next Door.

Best wishes!

Mon Mar 24 2008, 13:17

Thanks for the response Graham! I appreciate your feedback and your personal outlook on investing in real estate.

Mon Mar 24 2008, 13:09

Denton- I diversify my income porfolio. I invest a certain amount in Real Estate in general, and if the opportunity presents itself, more so. I believe, especially in this credit challenged market place, that it is good to be cash liquid and to search out opportunities, whether it be RE, commodities or whatever else comes along. I look for properties that are under market AND situated with the amenities necessary to steadily appreciate over the long term. I don't necessarily look for the "Buzz word"s you described. I look at all options including at the GRM property specific, Cap rates etc., and the long term economic health of the property location. If everything fits, I become serious. Real Estate can create wealth if done with the full understanding of Real Estate markets and their downsides as well as their up. I personally would not put all my investment eggs in one basket. I also want to enjoy life and not feel tied down and worry every minute of the day as to what my money is doing. I don't look to squeeze every nicklel and dime out of an investment. My 2 cents worth. Hope I was general enough for you.

Mon Mar 24 2008, 12:37

Denton, have you read "Rich Dad, Poor Dad?" There is a lot of good real estate advice there. The author has built great wealth with real estate as one of the main branches of his diversified income.

Another great book on wealth accumulation is "The Millionaire Next Door." it is an older book, but just last week in my tax seminar Sandy Botkin quoted from it. He said the 3 things that great wealth builders do, that the rest of people don't do, are:

1. Minimize their taxes to pay the least possible legal obligation;
2. 85% of them save 10% of all their income for their retirement;
3. Have diverse sources of income.

There are more great books, and books on CD. You might also start asking at your networking groups--some wealth-builders put together clubs or groups to--build wealth!

I do think real estate is a great way to build wealth. Attend wealth building seminars, talk to agents who list bottom of the barrel properies--they are often investors themselves. Try to work with someone who buys these kinds of properties, and watch how they work. They can be a goldmine of information, and they buy & sell properties often, so you can do multiple sales with them.

Good luck! Let me know how things go for you!

Mon Mar 24 2008, 11:57

Linda, I understand your concerns.

The point of the question is speaking in general terms. I understand that specific homes offer different opportunites. That is not my point...just want to see how people choose to accumulate wealth through real estate, whether it be buy and hold, or turning properties (however that may be).

And, to see how people are choosing to attain wealth (even though time frames, stress levels, and other factors will make one investment a better alternative than the other).

Thanks for the answer!

Denton Ward
eRealtyInvestors

Mon Mar 24 2008, 11:34

Wow! big question! The answer would depend on your financial goals, how long you want to be in, what risk level you are comfortable with, and the homes themselves.

Are you going to live in the home? does the under price home need signifigant updates or repairs?

My personal preference is for a home that is signifacantly underpriced, because you have already made money on it when you purchase it. The "Buy Low, Sell High" equation works best when you buy low. It's hard to force a "Sell High" situation if the market won't support it.

Again, that is my PERSONAL choice, without knowing the other factors involved, and please understand that I am not a personal finance or investment professional.

Mon Mar 24 2008, 11:28