My Real Estate Wake-Up Call

Last week, I drove out to size up a potential property investment... 

For just $6,000, I could by a piece of property in a nice neighborhood in Florida just 10 minutes from the beach. I had to check it out... 

I drove through the entry gates of the community. Fancy gas-lamp streetlights led the way, with perfectly manicured sidewalks tracking along next to me. After I passed the clubhouse, the children's playground was up next... 

It didn't take long to figure out what was going on... Nobody was here. No kids on the playground. Nobody jogging on the sidewalks. Why? Because there were no homes... 

Out of literally hundreds of empty lots, only a couple homes were standing. 

You can guess the story: A developer developed. The city put the streets in. Then, the market died. So here's where we are today... 

The builder hasn't paid the property taxes on these lots for two years. So the county is auctioning them off to collect the back taxes and penalties. The bidding starts at the past taxes due – in the case of these lots, that's about $6,000. 

Nobody has been buying these lots at the county auctions... even for the lowly starting bid of $6,000 (these lots probably sold for $50,000+ two years ago). 

I thought I'd go drive by and check them out, figuring... what the heck, someday they should be worth something, right? It was an easy drive, 10 minutes out, 10 minutes back, to see what you get for $6,000. 

Once I started driving the ghost town, er, neighborhood, the size of the problem hit me... 

Literally hundreds of empty lots stretched for miles in front of me. And this particular ghost town isn't the only one. Florida has hundreds of neighborhoods like this... not to mention California, Nevada, and the other boom states. 

Here's thing: Though the neighborhood is OK, there's nothing particularly desirable about it... nothing to distinguish it from the other decent-but-empty neighborhoods nearby. 

So even for the lowly price of $6,000 – the back taxes due – I wasn't interested in this vacant lot, or the hundreds around it. I knew I could end up sitting on that vacant lot for a long time, paying taxes and earning no income from it. 

This little neighborhood was an excellent example of why I always buy the beachfront property. 

Now when I say this, I don't mean you must "buy land on the ocean." I mean this: Whatever you buy for investment, buy the best you can afford. Stick with the very top-notch stuff. Stick with investments and properties that will always have value... that will always be sellable. 

But "buy beachfront property" doesn't give you a license to overpay. "That's a lot of money" and "that's expensive" are actually different ideas entirely. For example, $500,000 for a home on the beach is a lot of money... but it might not be expensive – it's likely a good value. 

Legendary investor Warren Buffett puts this idea a little different: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." 

In short, my drive around this particular neighborhood was a reminder of two extremely important investment ideas: 

Don't buy marginal stuff simply because it's cheap. Stick to "beachfront" properties. And even then... Don't overpay. 

Good investing, 

Steve 

P.S. I actually think the worst of the real estate crash is over. We're getting darn near the time when you can start looking for bargains and distress sales. Over the next 12 to 18 months, you could end up with the deal of a lifetime. In Friday's DailyWealth, I'll show you why. Don't miss it...