Dr. Steve Sjuggerud of Investment University gives two valuable real-world rules on selling or buying real estate.
The first rule: do not pay too much for good old earth. If you are after real estate stock, do not pay more than a 10% premium to the properties’ market value. If you want to buy a house, determine the comparable home values in the area and think carefully before you consider paying a 10% premium. The best advice in buying real estate is getting a 20% discount. It is hard, but not impossible to do, particularly if you are willing to groom up properties after buying them.
The second rule: do not pay too much for real estate “business.” Consider “price-to-earnings” (P/E) to determine your property’s true “intrinsic” value. Earnings take the form of rent. A good yardstick for real estate is the “1% above Treasury bond” rule. The nationwide net rent averages 6.15% (earnings-to-price ratio). In order to get P/E, inversing this value would mean that the “fair” value of your property should have a P/E ratio of 16. Forbes suggests that in order to get P/E for your property, one should get comparable rents data from relocation departments of large real estate firms. If you compute a low P/E, this means you got a sweet deal out of your property or you can expect high rental collections from it. If you compute twice as high as 16, then you should consider selling.
This is not however, a fixed guide. Real estate is liquid, unlike stocks, so there is a lot of guessing involved. Applying these rules does not guarantee success for you on a regular basis but it can improve your chances significantly by applying stock market rules to real estate. Just like the 1-2-3 model used in stocks, one always bears in mind that making money in the long run is impossible when the P/E is above 17.
