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Last Updated: Feb 18th, 2008 - 14:39:01 |
Who makes money in real estate?
Let’s explore the fascinating question: Who does make money in real estate, and how do they do it?
The specific type of property we'll focus on in this article concerns residential real estate. It won't come as earthshaking news to you when most people say that they bought a house in order to live in it. Basically, they chose it because they liked it.
Not all of them do, however. And therein lies a key distinction. Many bought the house not because they were fond of it, but because they hoped you would be. It was purchased for resale. We'll call the first group "nesters," the second "investors."
What makes residential real estate different from, say, common stocks is this: There's no such thing as a nester in stocks. People don't buy a stock certificate for personal use. It's too small to serve as a blanket and doesn't taste very good. It's also not much fun to look at for long. That forces them to think about its resale value even before they buy it.
Some people try to apply objective criteria quite consciously, whereas others operate more intuitively. They're convinced it will appreciate in value, so they make the leap. As often as not they fall on their faces but at least they knew what they were doing -- or thought they did.
But in buying a house to live in, personal and investment aspects -- subjective and objective criteria -- are being mixed. Under the circumstances, nesters might have been expected to do less well than average. As one complained: "I think I let my heart instead of my head guide me in picking this place."
People who are buying houses they intend as their principal place of residence tend to pick properties that are distributed somewhat randomly. Price, the nature of the neighborhood, practical considerations, such as commuting distance to work and the quality of local schools, are deciding factors.
On the other hand, the pattern of purchases made by those who label themselves as deliberate investors, and who are buying the house for resale, is anything but scattered. In fact, the houses they choose tend to be clustered in zones that had been classified as "hot investment areas." These are towns and streets that have allegedly been targeted for such things as urban renewal, a new shopping center, an industrial park or are in the path of a major new highway.
A reason nesters typically reap a greater profit is the length of time they hold on to the house. The median holding period is almost six years, versus a little under three years for investors. Commission costs and taxes, even at capital gains rates, tell only part of the story of reduced profits. A far more significant factor is that investors repeatedly wound up selling too soon.
There are two conclusions to be drawn from the data. The first is that, thanks to persistently high rates of inflation, investors have looked everywhere to find something of value that will keep pace with the progressive erosion in the purchasing power of their money. The result is that the number of home buyers who now give as their number one reason for purchasing a home, "it's a good investment," has nearly tripled in the past two decades, from 26% to 76%.
The second conclusion is that personal judgment is worth more in real estate than anyone has previously imagined. Let me qualify this a bit: You can't just say, "I love the place, I'll take it." There are some hardheaded considerations and technical details that have to be carefully attended to. Yet the bottom line remains the same: If you buy a house because you like it, there will be other people who subsequently will like it too. If you buy it simply because you think it's a great investment, you'll probably be paying a premium for it.
So make all the computations you want on your calculator. But don't for a moment discount your fondness for a house when it comes to buying. It's certainly not true where stocks and bonds are concerned, but buying a house you like strictly for personal reasons increases significantly the chances that you'll do well when you eventually have to sell it.
USA Real Estate Listings:
http://search.ezilon.com/united_states/business/real_estate/index.shtml
Europe Real Estate Listings:
http://www.ezilon.com/cgi-bin/estate/realestate.cgi
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