Decisions, Decisions?
I will definitely tell my friend that placing an initial investment in a real estate development which is just getting underway an amount of $200,000 plus an additional $200,000 more depending on the situation is a very precarious deal. Investing is not like you are gambling for the reason that it involves a lot of risks not to mention the amount of money which was a result of years of hard work and sacrifices. Although it is already a given fact that there is always risk that is involved, the difference is that the odds should be in his favor. If this is not the case, then definitely my friend is not investing but gambling. I will tell my friend that investments should not be based on continued price increases. There is no guarantee that prices will continue up at any particular rate.
My friend should do deals that work even if prices go nowhere, and if values go up, he is that much better off. My friend should not pay too much for the earth and the business. He should not pay more than a 10% premium to the market value of the properties. Prices can fluctuate in the short run, in the long run, property prices are significantly driven by rental values. If he is going to look at the "Price-to-earnings" ratio of his property, my friend can learn about its true intrinsic value.
No one knows if the market will be profitable in the next three years or so. Investing that amount of money is very risky although my friend knows the consequences of whether he will continue with the investment or not. A more thorough review of his options and other alternatives to this kind of investment is a more proper way to deal with his predicament. He should do some additional studies and asked around from the right persons who have experienced this kind of situation in the past just to make sure that what he is about to go into will be positive for him and not at all depressing.
