Investors shouldn’t get caught up in the hunt for discounts.
Too often, people in residential real estate investing fall into a mental trap that says if you pay less, you win. Nothing could be further from the truth. Today I’ll discuss why that’s not a productive thought process and what residential investors can learn from the less emotional industry of commercial real estate.
I know hundreds of people who bought homes during the economic downturn who thought they were killing it, only for them to find out that their house sold for $30,000 less than they bought it for. It’s the same house, so what was different? The difference is time. Due to how the market is segmented, it’s very difficult to jump in at the right moment. It can change by the week, or it can change in a 90-to-180-day cycle.
Commercial real estate is typically less emotional than residential real estate because they’ve figured out and lean strictly on the math of investing. For example, a 280-unit apartment complex was purchased in Greensboro in 2018 for $19 million. It sold in December 2021 for $48 million. That’s a $29 million profit!
If you look at the numbers, you might think that it’s crazy that anyone would pay $29 million more for a property than what it was worth when originally purchased. However, when you understand concepts like return on investment and net operating income, you can get a clearer understanding of the value of these investments.
If someone wants to buy a building from you for $29 million more than you paid for it, know that they’re not stupid. They didn’t start business last week. They’re thinking about numbers that aren’t on your radar, and what’s more, they’re approaching the investment very unemotionally. They don’t even care about the product other than its quality; to them, it’s a vehicle they can use to get a huge return.
So many investors get caught up in the pursuit of discounts and deals that they miss some truly amazing opportunities. The answer to whether an investment is a good idea lies simply in the numbers, not in perceptions about whether or not someone got a discount. Real estate masters often pay top dollar for products like golf courses, hotels, and conference centers and still manage to turn a profit. The same can be true for residential real estate—you just have to get out of the emotional trap of needing a discount.
If you have any questions about investing in real estate, don’t hesitate to call or email us. We’d love to hear from you.
