Jacques Coquerel
How hard is your Money working for you? Real Estate Investing Opportunity Costs
Copyright (c) 2007 Jacques Coquerel
The most compelling reason for people to go into the real
estate investing business is to make money. Not just any
amount of money, but more money than they are currently
earning. This is why real estate investors and everyone in
this business are always after the opportunities that will
give them the highest returns for their time and efforts.
The question however is, you might be working hard enough
for money but is your money working hard enough for you?
This may seem a bit vague to you right now so, let me go
over a few things to bring some light on the question
stated above.
The Race between ROI (Return Of Investment) and IR
(Inflation Rates)
Most people disregard the effects of inflation rates to
their long term financial goals. Your return of
investments can be viewed as the amount your money has
grown over time while inflation rates can be viewed as the
buying power your money has lost over time. The most
common manifestation of inflation is the rising prices of
staple goods. Here's an example. 5 years ago, you
could've bought 12 eggs for a dollar while now you can only
buy 8. This means that in a span of five years, the dollar
has lost 1/3 of its value or buying power.
Similarly, a savings of 100,000 dollars in an account that
has an interest rate of 4% a year means that this will
become 104,000 dollars a year from now. Factor in an
inflation rate of seven percent and you will see that your
104,000 dollars is actually only worth 96,720 dollars in
buying power. So you may have worked hard for your money,
but your money was not working for you. Rule of thumb is,
always keep your money in an investment vehicle that gives
you a rate of return higher than the inflation rate. For
real estate investors, this goes for those real estate
properties that give you an ROI rate of less than the IR.
Opportunity Cost as a Hidden Cost in Real Estate Investing
According to the principle of opportunity cost in real
estate investing, it doesn't even end there because
according to this hidden cost, you lose money as well when
you forego an opportunity that could've earned you more.
For example, to buy a real estate property, you took out
capital worth $100,000 from your stock that earns you 15% a
year. Now, say the property was sold at the price of
$110,000, which means that your money in real estate
investing earned you 10% in ROI; you lost 5% or $5,000 in
opportunity costs. This is the amount of extra money you
could've earned if you didn't buy the property in the first
place. Similarly, if another investment opportunity having
an ROI of 30% was available during that time; your cost for
not taking this opportunity instead then becomes 20% or
$20,000.
Minimizing opportunity costs therefore means putting your
money in investments that earns you the highest returns
regardless of the fact that you are already making money
from your present investments. In simpler terms, it just
means that you have to make your money work the hardest
that it can to make more money for you.
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Jacques Coquerel is a real estate investor based in
Atlanta, Georgia. He has made more than 750 transactions
since 1996. You may visit one of his sites
http://www.reonline101.com and receive a 13-part FREE
ecourse on real estate investing.
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