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One of my favorite economics bloggers, Megan McArdle, wrote a post recently on the Washington, DC real estate market, extended to the state of the market overall. It appears to her that the single-family residential market has bottomed out, while multifamily still has a way to go.
Megan also posed the question of when, and if, a boom will begin again. Possibly, in her view, there won’t be a boom. After all, the last nationwide (really, worldwide) boom was driven by a couple of unusual factors: historically low interest rates, and a big, competitive market for subprime loans.
Megan is one of the smartest economic bloggers, and a lot of what she wrote here makes sense. Still, the post bugged me, because it focused on macro-economics, which is not the world in which most of us live.
We know that real estate investing success comes from a million factors, only one of which is the boom-bubble-bust cycle. Outsiders don’t see a lot of difference between real estate investing and stock market investing, but there is a huge difference. In stock market investing, there are really only three factors:
- You decide which stock or mutual fund to buy
- You decided when to buy it (what price)
- You decided when to sell it (what price).
All those apply, in a sense, to real estate investing. You have to decide what and where to buy, pick one or more properties at what seems to be an appropriate price, and figure out when to offer them for sale, at what price. But there are also these factors:
Price Factors Exclusive to Real Estate
- What can you do to cut ongoing costs?
- How are you going to treat the tenants?
- How can you renovate the property to make it worth more?
- What can you add to the property to increase the income it generates?
You can probably think of a few more. The point is that in between the buying and the selling, most stock market investing is essentially passive. Once you own it, you’re waiting for the right time to sell it. You really have no say over how the company is run.
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