Investing in Real Estate, 7th Edition

5

PAY LESS THAN MARKET VALUE

When stockbrokers and financial planners compare the profit potential of property to stocks, they often err: They ignore the return-boosting power of leverage; they forget that property cash flows alone can yield 7 to 12 percent (more or less); they fail to recognize that investors can enhance value through market research and smart management. And they miss the fact that (unlike with stocks), investors often buy property at a price less than its current market value.

If the NYSE market for Wal-Mart shares sets a price of $20 each, you will pay $20 per share. No shareholder need sell for less. The stock market instantly accommodates all sellers at the market price. From Apple to Xerox, no shareholder ever needs to cut his price below the current market value. Property markets work differently. If you want to pay $200,000 to $225,000 for a $250,000 property, you can find sellers who will oblige. Every day, some properties sell at below-market prices.

Of course, the fact that sales take place at below-market prices begs the real question: Does a below-market price mean that you have negotiated a good deal or a bargain purchase? Does a below-market price guarantee that you've made a wise investment? Absolutely not. Should you try to buy at a below-market price? Absolutely. Do I contradict myself? No. Here's what I mean.

If market values are about to head south in a hurry, then your price of $225,000 for a $250,000 property might not look so good. If the ...