Nothing like many media reports about impending doom in the sub-prime lending market and a kneecapping of the Dow Jones to add fuel to the fire of those claiming that the real estate bubble isn’t close to bottoming out, a recession is looming, and that anyone inetsting in real estate now will be completely and utterly screwed.
I can’t claim to be unbiased, seeing as I’m about to close one on property and am scoping out others, but I also can’t see much value in any wide, sweeping predicition about the future, especially when dealing with pretty complicated, intertwined phenomenons. I think it’s especially dumb to make broad claims about real estate, as the market not only varies greatly from region to region, but state to state, and even city to city, within states.
It’d be silly, though, to try to argue that investing in real estate anywhere in the US is a no-brainer. The doom and gloomers have a lot of ammo on their side, and the shaky sub-prime situation should be a major, major concern for anyone that owns property that isn’t paid for.
Investing in any real estate right now is risky, especially if you’re taking on debt to purchase properties. Don’t kid yourself otherwise. But you also shouldn’t equate “risky” with “dumb”, as long as you understand the risk and are operating within your risk tolerance.
Tolerance to risk is a pretty fluid thing. Some people have zero risk tolerance, and think that anyone without 5 years of current salary in savings is an idiot; other people have a risk tolerance of infinity and will make and lose very large sums of money throughout their life.
Most of us average folk fall somewhere in between the two, likely edging towards the low risk side of the spectrum. But there’s no “right” or “wrong” level of risk tolerance. It is what it is. All you can do is be honest with yourself and your goals, and operate within your comfort zone.
Where people get into trouble is when they take on more risk than they’re truly comfortable with, because a friend of theirs got filthy rich leveraging himself to the hilt to get into condo developments in Miami at exactly the right time. So they do exactly that, with no real understanding of what might happen if conditions move against them, and the sorts of decisions they’ll have to make.
If things go sour, they freak out. And, almost always, people make terrible decisions when freaking out, ones they’d never make if they approach a situation rationally.
If you’re looking to invest in real estate these days, be honest and realistic about both your goals and your risk tolerance. If the market turns south, are you comfortable with selling and taking a 10% loss? Are you emotionally detached enough to make the right decision, based on your plan?
And (maybe more importantly) is your spouse, significant other, or family as comfortable with the risk you’re taking on as you are? If yo’re not living in a bubble, you need to make sure everyone impacted is on the same page, even if they zone out when you babble on about all of your great investment plans. They may be bored to tears to hear talk of all your plans, but you better believe they’ll be interested and impacted and involved (for better or for worse) when money starts actually flying out.
One key element of speculation to always keep in mind is that no one bats .1000 in the world of investing and speculating. People who are successful in speculating in any market are almost always those that minimize the loss in bad speculations and maximize their return in good speculations. If you limit the hits you take on bad investments, you still keep the bulk of your investment capital in play, letting you write off the loss and move on to the next opportunity.
Everyone takes hits eventually, and everyone makes bad investments. That’s no reason to hide from risk. Just be smart about it, know what you’re getting into, and always have a plan, no matter what happens. If you want to get ahead in life (i.e. want to make money), you have to be willing to accept a certain amount of risk. No one gets rich sitting there, cowering under the bed.
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