There's lots of talk of a bubble in real estate prices in all sorts of media at the moment, isn't there?
…and I think it's seriously detrimental to your wealth creation plans if you let the journalists influence you into not taking any action.
Let me ask you a question…
Will property be more expensive in 5 years time?
I'd say that if you bought well located properties in most of the major cities, you're pretty safe in regards to capital appreciation.
I'm always amused when I see people in the last stage of negotiation walk away from the deal because they might be $2,000 apart.
Does it really matter if you paid too much for your investment property?
Let me tell you a couple of real life scenarios.
About 7 years ago, a friend of mine asked me to come along to an auction, more from a point of view of moral support.
He was looking at purchasing a property as his principle place of residence.
The suburb was Ivanhoe, which is about 12kms from the Melbourne CBD (a quality blue-ribbon area).
I asked him what his limit was, and he said he was going to go up to $700,000 and not a cent more.
I'm always curious as to why people pick limits that are round numbers.
Anyway, the auction began in ernest and my friend, nervous as all hell got involved around the $675,000 mark.
Three bidders at that stage were competing for the property and the price quickly got to $695,000.
…Bidding slowed, and now there were only 2 left.
My friend and another couple.
I was interested at that point to see if my mate would stick to his original plan of only going up to $700k.
The bids were now down to $1,000 bids…
It was obvious to me that the auction was reaching its completion, and then something unexpected happened.
The young couple put in a $10,000 bid.
Hmmmmm… That certainly put the cat among the pigeons.
My friend turned to me with sweat consuming his brow and said, “Let them have it…”
It seemed to me that he was a beaten man. In the auction world, a big $10,000 bid like that is called a knock-out punch.
We're now at $705,000, and remember, he was looking at this property from a point of view of a principle place of residence… So I suspect there was a little bit more emption attached to this than a run of the mill investment property.
He consults his wife of course, and they agree that they're over their limit and maybe they should just give up.
He turns to me and for the first time asks me what I think.
I asked him how long he was going to keep the house…
He said, “Probably 10… 20 years.”
I then told him if he really wanted it, and he loved the area, then what's the big deal if he paid $20k, $30k, even $40k more?
This seemed to reignite his enthusiasm.
I told him to put in a $500 bid.
When someone tries to knock you out with a big knock out punch, the last thing they want to see is you still standing with a smile on your face.
It's very cheeky, and an act of confidence when you respond back with a tiny bid after his massive attempt to knock you out.
The young couple came back with what they thought was the right thing to do, and that was a $500 bid.
My friend looked at me and said, “What now?”
…I said, make a $10,000 bid.
You should have seen his face.
I can only imagine the thoughts running through his head. Here we are at $716,000 with his previous flimsy limit of $700,000 and I've asked him to up the ante with a $10,000 bid.
Thinking… Thinking…. Thinking… and the auctioneer counting it down, I reminded him that this was a long term investment and in 10 years time it'll be so insignificant that he'll kick himself if he lost this auction for the sake of just $10,000 (or thereabouts).
With great doubt and trepidation he shouted out, “Seven twenty six!!”
You could see, even from our distance, the young couple's face turn white.
They had nothing left in the tank and my friend's actions proved to them that they would have to keep going and probably pay $30 or $40,000 more if they wanted the property.
The auctioneer counted it down and my friend had himself a brand-new home.
As I mentioned earlier, this was 7 years ago.
The reason why I tell you this story is two-fold.
He recently got a valuation on the property for $1.4 million, and to think he could have missed out on this deal for a mere $20 or $30,000 dollars.
Ok, he could have bought something else and maybe have made the same amount of money, but the reality is this was a well-located house in a better than average street in the suburb.
The second reason I'm telling you this story is that you can pay too much for real estate and still make a bundle of money if you have a long term buy and hold philosophy.
That's why I find all of this current noise about property bubbles and whether it's a good time to buy real estate really amusing.
You ask any pro who has been in the market for a minimum of 10 years about when a good to buy is.
…and he'll simply tell you, “Whenever you can.”
So if you're in a position to invest in real estate right now, then it's a good time to buy.
Think about it, an extra $20,000 is around $29 per week in extra mortgage payments (based on 7% interest rates).
Now I'm not saying to you that you should go crazy and simply pay the asking price on any invest property, but if you like it and its well-located, then in 10 years time, think about… You're not going to be upset that you paid $20,000 more.
Ok, when I say, “well located” – here's what I mean…
If you purchase anything in a major city within a 15km radius and I can guarantee you that even if you pay 5-10% more than the market value today, in 10 years time you'll be a clear winner.
Sure, everybody's circumstances are different and I understand that sometimes there could be some issues with funding the extra $26 per week… However, it's an investment in yours and your family's future.
So the moral of this story is don't be too concerned about what you're reading and hearing in the media.
It's all short-term perspectives.
The long-term reality is real estate will be more expensive in 10 years time.
..and what that simply means to you is the earlier you begin, the better it will be for you financially in the future.
Get out there and get serious.
Signed with Success,
P.S. Share your stories on our web site of how you paid more for property and sweated on it at the time… Only to find out that in time it was the best decision you ever made.
P.P.S. Or, tell me I've got it completely wrong, that you should always negotiate hard, follow your budget, have a clear valuation strategy, and that is the way to invest in real estate.