Low Risk Investment Strategy for Locals - Building in a Seller's Market

It will be fair to say that from time to time, this blog will have some articles that require more than a Twitter read or Facebook post.   Sometimes I am trying to provide strategic thinking and rationale for that thinking so that you too can think.  I have never wanted to be a traditional Real Estate Agent.   I do not think I am or that I will be.  I am a thinking person's real estate agent looking for thinkers who want an understanding of the actions they are taking.

I have prior experience as an Investment Manager managing pension fund portfolios and portfolios of investments for private individuals. I recommended the purchase and sale of equity in public companies.

In addition, I spent some time as an assistant manager of a Money Market Mutual Fund.   I have continued with my own private investing over the years even as I transitioned to a Business Consulting career from which I retired to pursue all things real estate.

I have taken from that over the years a way of thinking and controlling risk while still seeking above average returns.  Real Estate, even the homes that I have owned, has become part of an investment portfolio thinking process for me.

One thing I have learned and live by as an investor, is that for selling's sake, selling is usually not a wise move with assets that historically represent a store of value.   Among assets that represent the most consistent store of value are Stocks and Real Estate.

Another thing I have taken from my time as an investor is that The Market Is What It Is....Not What You Want It To Be.   What that means is that prices are what they are at any given moment and not what you want at that moment.  

The last thing I have seen and that continues to be true is that the vast majority of people respond in two specific ways regarding Stocks and Real Estate.  When they perceive prices are rising, they tend to boast and think about Net Worth and tend to take little action to protect wealth.  They prefer to want prices that are higher than the current price and like to project high prices to others expecting always higher prices.    When they perceive prices are falling they respond by wanting to transact often selling at precisely the wrong time.

There are strategies in equity investing that help you maintain your stock positions while continuing to provide strategic price protection when prices are changing.

There are also strategies in Real Estate to protect you in times of fluctuating prices.   What most do not understand is that fluctuating prices does not just mean prices going down.  It also means prices going up.

Let us assume you own a home along the 30-a corridor.   Let us also assume you are getting many people telling you it is a Seller's Market.   Let's assume we are happy about the value of the home and now we want to learn about strategic ways to grow investment value in any home and protect growth in our portfolio with strategic ideas.

The lowest risk best idea for protecting wealth that has grown for you and not losing exposure to a possibly near term rising market while remaining invested in a great store of value is to SELL your current home and Build a new one.  Let's look at the logic of risk and reward here.

Lets assume simple math and a home currently worth $1,000,000.   That home in today's 30-a market (As of August 2015) comes with basic assumptions of where it is located relative to the beach, square footage etc., but this discussion can apply to any price point.

Let's then assume that nearby your current location is a lot available that is more or less equivalent to your lot.   That lot is available for $265,000.   Let us also assume that you are creative and decisive.   It is my view that you have a variety of ways to build a new home.  You can use advisory services to help you and connect you to alternative proper ways to build a new home.  By these ways I mean the permitting process and the process of arranging sub contractors and materials purchasing.

Let us further assume that you are not convinced by the mere quote of how much "some or most" people are paying per square foot to have a nice home built.

You can build a new home of about 2,800-3,000 square feet nicely finished for neat $495,000 (your approach may result in higher or lower costs) including design and all permits.   I can show you how that is done.

That is now a total of $760,000 for the new home.    Why would that new home not have a value of $1,000,000 if it is more or less equivalent to the comparable home you have?

Sell the home you have for $1,000,000 and build a new home.  After all costs to close the current sale, you will free up $180,000 for other purposes while still maintaining the $1,000,000 value.

So what is the risk if prices rise over the construction period?  The risk is limited to your ability to stay focused on the goal and execute the build with your partners effectively.

What is the risk if prices fall?  NO DIFFERENT THAN THE RISK YOU CURRENTLY HAVE and in fact LESS.
By freeing up cash for other purposes, if prices fall even to your cost of construction, you are STILL WHOLE vs. the $1,000,000 current home value.   YOU HAVE EFFECTIVELY CREATED A KIND OF PUT OPTION protection for your investment.

Let me show you all that this article can mean to you.

Now for a Real Life Example I could show you? (2016 June CO Date)  

REAL:  Sold Existing Home for $820,000
REAL:  Purchased Better Located Lot for $330,000
REAL:  Budgeted within 5% a 3859 sq ft build at $740,000 with ALL Costs
REAL:  Comparable valued homes in that new area are at $500 per square foot
REAL:  Comparable Market Value of New Home $1,601,485

That is what is really possible on 30-a for those willing to think it through and value the process of an investment strategy.

Let's Build Something Together Series

PLEASE REMEMBER THIS IS NOT INVESTMENT ADVICE NOR SHOULD YOU TAKE ANY ACTION BASED ON THIS ARTICLE.   THIS EXAMPLE DOES NOT CONSIDER YOUR TAX SITUATION AND YOU SHOULD CONSULT A TAX ADVISER OR ATTORNEY ON SUCH MATTERS.  YOUR CHOICE OF BUILD OPTIONS THAT MAY BE DIFFERENT THAN THOSE CONSIDERED IN THIS ARTICLE COULD CHANGE YOUR RESULTS.