08 Oct Pancakes and Real Estate Investing: The Secret Ingredient
When making something as simple as pancakes from scratch, it’s important that the right ingredients are all included in the proper amounts! If you miss an ingredient or add too much or too little of one, those pancakes are not going to turn out right.
One morning, years ago, I decided to surprise my wife with pancakes made from scratch. It was early in the morning and I had purchased all of the ingredients the day before. I wanted to have them ready before she awoke so as to complete the surprise. But in my hurry to make them, I forgot an important ingredient and they turned out to be as hard and thin as teacup plates!
As soon as Becky saw them she said, “Oh you forgot to put in the baking soda.” I checked and sure enough the baking soda was sitting unopened on the counter. I was obviously disappointed because I worked so hard to surprise her. But I did learn an interesting lesson about how important such a small ingredient can be.
Instead of eating the porcelain pancakes, we went out for breakfast and had a nice morning date!
When identifying the best real estate markets to invest in it is vitally important to know what a good investment market looks like. An investor should be able to do some basic research and determine if the “baking soda” has been left out. Below is the ingredient that can help you determine if the area you are considering is a good market to invest in. The ingredient is this price factor:
Prices are not more than 3 to 4 times median income.
This was the problem when the real estate market crashed from August 2007 through 2011. We had properties selling in some markets for 15 times median income. Think Las Vegas and Phoenix. What that tells us is that the locals were not buying the real estate. It was investors from the outside with deeper pockets than the locals. That’s one of the most common reasons prices get driven up so high.
But real estate prices will always come back to 3 to 4 times the median income of an area. This is true unless it is an exclusive vacation area! Then the national economy determines the health of the market—not the local economy.
It is simple to determine what I am talking about. For example, Google the median income of Colorado Springs. Then Google the median price of single family housing in Colorado Springs. If the price of the house is more than 4 times median income, then it is a safe bet that that market is over priced.
Back in a 2014 class I taught at Charis Business School, I had student research Colorado Springs. At the time the median price was 3.5 times the median income. That meant that the market was not an over-priced market and possibly a good place for investment.
Where are you interested in investing? Does this formula work out?
Join me every Thursday for more real estate investing tips—and sign up below for free real estate training videos!