How High Is Up?
The answer can be as simple as one flight of stairs. It also can be as grotesque as 300%. Since I’m talking about real estate, I’ll skip the flight of stairs type of answer and concentrate on the 300% side.
Unless you’ve been living in a cave in Zimbabwe, you know the real estate market has taken a directional turn – down. In some areas, if the articles I read are correct, like Detroit and Cleveland, you can literally buy foreclosed properties for less than 10¢ on the dollar. That looks like one heck of a deal to the naked eye.
However, if you do the numbers, it is actually one hell of a bad buy. In order to understand why I say what I say let’s look at the math of gains and losses. By the way, you can get exact numbers by doing an Internet search for that exact phrase. My numbers in this post are rounded down to the nearest whole number.
Math Is A Two Way Street
I will use $1000 as the example number. Making believe your property was worth $1000 two years ago and is now worth only $620 means you’ve sustained a 38% decrease in value. If you’ve seen 38% before that’s because someone wrote an article that says 38% is the average decrease in property value in the U.S.
I say who cares what the average value is because I don’t live in an average value area. I live in one of the highest foreclosure states in the Union. You too may live in an area where the foreclosures are still running rampant. Therefore, 38% means very little.
That’s why I say 38% is just another number. But that’s going down a side track. If you are looking for your property to rise back to the $1000 value to restore the loss, by what percent must it go up?
Wow, that’s almost twice what it went down. Yep, but that isn’t as bad as if it went to a value of $250 meaning it experienced a 75% decrease. To restore the value of $1000, it would have to rise in value by 300%. To me that is a bigger wow.
As the percent of decrease increases, so does the rise in value percentage. In other words, if you can buy a property that has decreased by 90% like in the cities I mentioned above, your rate of rise would be close to 450%. Remember, this is a rounded number so do your research.
Opportunity Is In The Eye Of The Beholder
So what do these numbers actually mean? Depending on what side of the numbers you are on, they could be disaster or opportunity. Let’s say you bought a property for $250 and it went to $1000 in an acceptable period of time. You just made a fantastic return provided you sold it with very little expense.
If you owned the $1000 property and it slipped to $250 but did nothing, you are simply sitting on an asset that has decreased in value. No big deal if you aren’t planning on selling and can afford to continue to pay the mortgage. No big deal also if you needed a big loss for tax purposes and decided to sell. That actually may be an opportunity. On the other hand, if you must sell, you just encountered disaster.
When I was a stock broker, I remember people using the sell at a loss strategy. They would sell stocks that had slipped in value so they could take the loss to offset gains and reduce their taxes. I fully realize this may have limited application. However, it is still an option.
The purpose of this post was to present the two sides of the math, in general terms, that comprise this market. The numbers are illustrative only and meant to jump start the thinking process and the manner in which you look at your investment(s). After all, it is your money at risk and you should have as many facts as possible in order to make an informed decision.
Photo Credit: timonoko