Huge Oversight Most Make On Real Estate Projections

Q: Gerald, real estate values have risen a lot lately, does it still make sense to buy real estate? Javier, West New York, NJ

A: Whether it makes sense to invest in real estate, or any asset for that matter, depends on your specific financial goals and your personal financial situation. The big mistake most people make when anecdotally considering real estate from an investment perspective is looking solely at it in terms of property value appreciation.

You often hear people lament about not having bought property in an area that has seen market values appreciate. When talking about real estate in these areas, people say things like, “I could have bought this property for X amount and now it would be worth Y amount” (Y being a significantly higher dollar value than X).

My first reaction to that common investment fantasy is that if you could time travel or predict the future, it would be a lot easier to make money in any investment. More importantly, when people think only about the current market value of real estate they are overlooking the cost of capital improvements and repairs. When you calculate return on investment (ROI), you have to include all factors in your analysis, not just what first comes to mind.

For example, when you repair a boiler or replace or repair a roof, those costs will affect your return on investment on that property. You can’t really spend equity – it’s a property’s ongoing income and expenses more so than current property value that will affect your real estate investment the most – because property value only matters at three points while you own property:

1. When you buy,

2. When you sell or

3. When you use your property as collateral to borrow money

Property income and expenses are always critical factors while you’re a property owner.

Thanks for your question, Javier. For more real estate information and tips visit my blog at geraldlucas.com.