Buy Smart and Hope
Last time, I was writing about techniques to rapidly increase your real estate equity.
One favorite approach to real estate investing, if you want to rapidly gain equity, is to buy in an area which is about to go up. People go to great lengths, studying data, analyzing demographics, watching trends and weighing up all sorts of factors, to work out the areas which they think are about to explode. For convenience, I’ll label this approach ‘buy smart and hope’.
I call it smart because it acknowledges that a rapid increase in equity is A Good Thing, and it tries to maximize your chances to get it. I use the word ‘hope’ because there is no guarantee.
I want to suggest that this strategy is a poor-man’s version of what I spoke about last time: ‘buy below market value’. I’m not saying it’s a bad strategy. It’s far better than having no strategy. I’m saying buy smart and hope is clearly inferior to buy below market value. Why?
- you don’t get your equity immediately. You have to wait.
- you don’t get guaranteed equity. You hope that the market moves like you thought.
So, it’s slower, and it’s more risky. Therefore, it’s inferior, if your goal is rapid equity growth.
Think of it this way. If you had a choice between these two methods of making $100,000 equity:
(a) buy at property for fair market price of $400,000. Wait for value to increase to $500,000.
(b) Find a property worth $500,000. Buy it for $400,000.
Which would you choose? Where possible, I would choose (b). It’s faster, and safer.
I assert that we only buy smart and hope because we can’t see how to buy below market value. Because we can’t achieve the one, we settle for the next best thing.