Georgia Real Estate investing education … Volatility Versus Risk in Short Sale Investments
One of the most common mistakes made by novice and veteran short sale investors alike is to confuse volatility versus risk. Unlike the stock and bond market where the principle can go to zero, real estate always retains some type of inherent value. To put it another way, when dealing with stocks and bonds what goes up must come down..and when it does it can drop to zero never to return again. On the other hand, real estate can go down but rarely drops to zero. Companies can and do go out of business. Real estate is still standing. Even if the structure is totally eliminated the value of the raw land beneath remains.
This brings us to an important difference between volatility and risk. Risk involves loss. True loss of the type that wipes away fortunes over night. A company is here today but gone tomorrow…along with it the stocks, bonds and investments that represent a lifetime of work. Volatility is different. Volatility means prices can go up and down then up again. It is a function of time – not absolutes. Wait long enough and the inherent value of the land itself will retain some type of value. It might rise, it might fall. It might rise relative to the work able to be performed on it or it might fall related to the value of the interest rate used to finance it…but in all cases the volatility is relative. The land does not cease to exist.
Today there are two types of investors – those seeking a return of their capital and those still seeking a return on their capital. In large part, the difference has to do with where they have decided to invest their cash. Those that follow a traditional investment strategy (buy and hold stocks, bonds, treasury bills and keep some cash on hand for an emergency) are watching in utter dismay as they watch some of the biggest business concerns in the nation – indeed the world – drop to a fraction of their former value while others may simple cease to exist. The risk is very real and leaves traditional investors few options rather than attempting to park their cash into ‘safe’ federal treasury bills in an attempt to preserve their capital.
On the other hand, short sale investors are still indeed seeking actual returns on their capital – not merely a return of capital. While most are able to turn relatively quick profits, even those that made an early mistake are comforted by the fact that the long term risk is relatively minor…if in fact, even existent. While the price of a home and land may be volatile and subject to increase or decrease over any given period of time…it is equally likely to remain in existence. Unlike financial instruments where absolute loss is a very real concern, hard assets like real estate are primarily a function of time. The inherent value eventually returns.
Consider a worst case scenario for each of the following investments:
Stocks/Bonds: Worst case = cease to exist. Value drops to zero and unable to sell.
Cash: Worst case = cease to exist. Value drops to zero. Unable to spend (ie, confederate dollars).
Real Estate: Worst Case – price drops. Still can rent, sell, owner finance, plant crops or otherwise retain some form of value. Price never drops to zero as land retains an inherent value depending upon use, natural resources and other productivity.
- Ten habits of highly effective real estate investors (theglobeandmail.com)
- Here’s Why China Can Never Escape Export Dependency (businessinsider.com)
- 401k / IRA Rollover Land Investment Opportunities (prweb.com)
- Why Dividend Hunters Have MLPs in Their Sights (dailyfinance.com)
- Timbercreek Global Real Estate Fund raises an additional $2.85 million for total gross proceeds of $64.6 million, as the Over-Allotment Option is exercised by the Agents (newswire.ca)
- Fosler Reviews Latest Stimulus Attempt (video.forbes.com)
- Coupon Starved Investors Gotta Love JNJ and IBM (blogs.forbes.com)
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Thanks for reading this, Roland Lorans.
Roland is a Real Estate Agent at Better Home and Gardens Real Estate Metro Brokers .
Phone: (770) 866-2561 or 404-843-2500 firstname.lastname@example.org.
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Roland Lorans specializes in Loan modification assistance and Home Short Sales in Hamilton Mill Dacula, Buford, Suwanee, Alpharetta GA and Metro Atlanta Georgia