A few years ago, my friend Gordon stopped me as we walked out of our weekly Rotary meeting.
“Hey Osman, I have a question for you. What’s the best real estate investment?”
Now, I have a lot of respect for Gordon. He is generous, extraordinarily successful, and a deep thinker.
“Uh… great question,” I stammered, caught off guard.
“The answer is too long for a parking lot conversation. I’ll get back to you.”
I was vying for time because, honestly, there is no simple answer. There are many different types of real estate investments and endless ways they might turn out good or bad.
How do you see through the fog and mirrors of the real estate market and make a smarter decision? The short answer: develop a strategy based on a deep understanding of the potential risk and return, while managing your own emotions.
For the vast majority of people, the latter is where trouble arises. Decisions are largely driven by emotions. Everyone would like to think that they are rational and will take time to consider all the pros and cons, especially around large investments or life choices. The opposite is the case. Feelings of security, fear, or vanity often take the driver’s seat. Facts and data are brought in largely to support decisions that have already been made by emotions.
How do you check that pattern of behavior? By instituting a decision making process that balances emotions with rationality, early in the process. It starts with a discussion of objectives and timeframe. Sometimes, this is very personal but without a clear understanding of the goal, there is nothing to measure against.
Getting to the closing table is not a measure of success.
Real estate assets are expensive, illiquid, and carry high transaction costs. It doesn’t matter whether you’re buying as an investment or for personal use, a thorough evaluation of risk and return are essential if you want to make an intelligent real estate decision. This is why the pros say you make your money when you buy the property, not when you sell it.
The best investments offer returns disproportionate to risk.
When it comes to real estate investing, return comes in many flavors. For primary homes, qualitative benefits often outweigh ones that fit neatly onto a spreadsheet.
A few possible returns from a well chosen real estate asset:
A great place to live for you and your loved ones.
A design aesthetic and living experience that inspires, nourishes, and fulfills.
Potential for an addition, remodel, or complete new home in the future.
Secondary income from an ADU or a place for your guests.
Meets current and likely future functional needs.
An extensive, well qualified, affluent pool of potential tenants or future buyers.
A neighborhood and community that you love.
An appreciation rate that is much higher than the cost of capital, inflation, and maintenance.
Potential risks and liability:
Deferred maintenance.
Environmental issues.
Construction defects.
Safety issues.
Poor energy efficiency.
Bad locations.
Dysfunctional layouts.
Limited number of possible tenants or future buyers.
Lack of potential to fulfill future needs.
Incompatible neighbors.
Poorly understood regulatory risks.
Again, well chosen, thoroughly vetted real estate assets offer disproportionate returns to the risks assumed by the buyer. No real estate investment is risk-free. Intelligent real estate decisions are based on a deep understanding of risk and the return.
Ultimately, this is my advice to Gordon: develop a clear strategy, thoroughly evaluate risk and return, and most importantly - choose your real estate advisor carefully.
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| Who's side is your agent on? |
If it feels like your agent is pushing you to write an offer, skip due diligence, or is playing on your emotions, you’re dealing with a salesperson, not an advisor. Listen carefully to not just what they say, but how they say it. Look for statements designed to bolster your confidence, like “Boulder real estate only goes up,” or proclamations of their expertise, such as “I’m the #1 agent in Boulder.” These have one motive: overcome your objections by manipulating emotions. While an agent’s confidence can feel reassuring, it does nothing to help you make an intelligent decision. You’re the one that has to live with the investment, long after your agent’s commission has been paid.
Remember: Finding the house is the easy part. A true real estate advisor should act as a sounding board for your concerns and a source of considerations that otherwise, would not have occurred to you.
It can be challenging to tell the difference at a first meeting. This is why it’s important to interview and see property with several agents before making a commitment to working with one, exclusively.
Osman Parvez is the Founder and Employing Broker of House Einstein. Originally from the Finger Lakes region of New York, he lives in Boulder with his wife and their Labrador Retriever. He has been a Realtor since 2005.Osman is the primary author of the House Einstein blog with over 1,200 published articles about Boulder real estate. His work has also appeared in many other blogs about Boulder as well as mainstream newspapers, including the Wall Street Journal and Daily Camera. For more information, click HERE.
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Thinking about buying or selling and want professional advice? Call us at 303.746.6896. Your referrals are deeply appreciated.
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. House Einstein strongly recommends conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. Image credits: Pradeep Ranjan, Emily Morter.
