Real estate bubble that adds price and risk to location, location, location Mantra

Real estate investors with the familiar mantra location, location, location are nervously replacing second and third location with price and risk. With home prices rising to new levels every day and concerns that some markets homebuyers are entering could start to lose air, their appetite for risk is creating some sleepless nights. Tired buyers no longer consider the best location, they may not even be able to afford it, and if a second-tier location offers slightly less appreciation at a lower price, they will buy it. This new willingness to compromise on location and still take risks near the top of the market clearly sounds like buyers are willing to reinvent a mantra rooted in real estate lore.

After all, with all the hoopla about weekend real estate millionaires, would-be apprentices, and flipping fever, who wouldn’t want to jump on the real estate bandwagon? Almost everyone is talking about, producing and trading real estate mega-gains today. What they are not talking about, producing, or marketing is the potential risk and financial ruin that could lie in wait for those who jumped in early, did little research, collected down payments, or took out interest-only loans.

Homebuyers looking to buy in overheated markets should consider how much current prices have risen over the past year, two years, and five years. Compare those rates to the potential pool of buyers to pay future prices at the same rates in the same markets. Will the local economy and rising personal income support the home price spiral? Here’s the bottom line: Are you willing to pay your projected appreciated sales price when you go to sell?

Today’s major bubble markets are not for the faint of heart from a risk perspective. If you are new to real estate investing, keep in mind that you should have a high tolerance for risk and leverage. Many first-time real estate investors rush out and buy properties with no money down before finding out if they will have the cash flow to support the expenses. Pace yourself when buying rental properties, not everyone is cut out for homeownership. Retain some financial liquidity for unforeseen problems.

The best defense in today’s real estate market is to have a financial planner or account review your investment strategy before jumping into the new real estate paradigm. Your mantra should be location, price, and risk.