Writing for The Street, commercial real estate guru David Scherer lists 6 Rules for Value Investors to Buy Real Estate at the Right Price. While he is speaking specifically to commercial investors in his article, I will describe how to apply each of Sherer’s rules to residential real estate.
But first, why is buying at the right price so important? It’s the only way you can ensure you make money. Redevelopment projects can take long enough for the markets to change, sometimes radically. That’s all well and good if the market goes up, but it can be devastating if the market tanks. As the truism goes, “You make your money when you buy. You just get paid when you sell.” Or as Sherer puts it, “For real estate investors, it starts by understanding the difference between price and value. Price is what one pays, while value is what one receives. Buying investment property at too high a price isn’t a good value.”
Now for my first caveat. If you do pay too much for your property, all is not lost. You can still make a profit if you can afford to hold the property long-term. Real estate prices historically trend upward given long enough. But when you’re getting started, a single bad deal can end or significantly slow down your business. That’s why it’s so important to do your homework, know what you’re buying, and know what you can sell if for.