I hope that everyone reading this note has had a restful holiday weekend.  This is my favorite time of the year.  In our go go go society we rarely take time to pause and reflect on the fact that even when life may seem difficult or stressful there are many things for all of us to be thankful for. 

Now, after taking some time with family and friends I’m back to the blog…

Thanks to those of you who have forwarded suggestions on the evaluation tool; two-way communication is vital for our business model here at EquityScout.com and I welcome feedback.  We’re working on a redesign of some of the features of the evaluation tool and plan to be announcing something in this space very soon – changes that will take an already user-friendly tool and make it even more intuitive. 

However, one question that I’m always at a loss to answer is “how come my numbers don’t work?”  Well it’s not exactly that I’m at a loss to answer – it’s just that the answer that I have is one that investors often don’t want to hear. 

In certain areas of the countries – areas in which homes are priced at or below the “theoretically correct” valuation – it’s relatively easy to invest in properties that produce positive cashflow from the day buy them.  In other areas, however, it’s tougher. 

In some areas of California $500,000 buys you a fixer-upper two bedroom starter home that you can rent out for $2,500, maybe $3,000.  That’s a recipe for negative cashflow. 

Does that mean it’s a bad investment?  Well that’s not for me to say.  What it does mean is that if you invest in that property you’re essentially stating your conviction that prices in the area will continue to skyrocket.  The only way the investment will make a reasonable rate of return is if that properties continue to appreciate at double digit rates. 

If that’s  your view, then you can act upon it by buying the property.  If it’s not your view, however, stay on the sidelines for now.  Ask yourself: are you investing in the income generating potential of the property based on what you’re paying for it, or are you speculating on what you think the market will bring.  There’s a role for both speculators and investors in the market.  Either approach can work – but where you get in trouble is if you think you’re in one camp but your actions actually put you in the other.