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Real Estate Investing as a Catch-22

Posted on June 15th, 2010 by John Reeder

One of the key themes that I write about on this site is the paradox that exists in real estate investing involving perceived risk and actual risk, and the way that the paradox impacts how investments actually occur.

To put it a little more simply, the times that we perceive as being the highest risk periods, are probably (using the benefit of hindsight) the lowest risk periods.  Conversely, the periods that we perceive as being the lowest risk periods are likely the truly high risk periods.

Or to put it more simply:  At bubble peaks you’re going to talk yourself into doing deals based on slim margins because you’ve watched the market run and run and run.  During market troughs, you’re so gun shy over the blow up in the market, you will command hefty risk premiums in order to make any investment.

I think the place that this paradox creates the most havoc and mayhem is in equity and debt raising.  Beware the day when it becomes easy to raise money.  Chances are that the end is probably in sight.  Conversely, if you have to scratch and claw for every nickel that you raise, it’s probably a good sign that there are deals to be had.

Another name for a paradox is a Catch-22.  In some ways the real estate market does operate as a Catch-22.  In order to make a really great investment it’s likely that it’s not going to come easily.  So what about the investments that are easy to make?  Well, it’s likely that you’ll eventually want to take a mulligan on them.

June 15th, 2010 | Category: Uncategorized

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