In 2012, I bought a home in the Los Angeles area through a short-sale transaction. During this time, housing was not exactly popular.
Even though the housing bubble popped in 2008, it took several years for all of the crazy values to finally bottom – which meant that 2010-2012 was really the bottom of housing prices.
By mid 2014, the house that I had purchased was appraised for 70% more than what I had purchased it for.
On one hand I was thrilled that I was the owner of a home that had nearly doubled in value. On the other hand I was extremely weary of the dramatic price increase.
Usually a steep price incline in any asset eventually leads to a steep decline.
So, my wife and I decided to sell the home after two years of ownership to take advantage of the capital gains tax exemption. This tax exemption applies to home owners who have owned (and occupied) their primary residence for at least two years and allows a married couple to clear up to $500,000 in profit tax free. It’s probably the best tax advantage the average American can use.
So we sold our home in 2014 and took the proceeds to invest in a variety of areas.
Fast-forward to today and that same house that we sold in 2014 is worth even more now.
In fact, I visited a friend of mine in the same area yesterday and he was telling me about most of the homes in the area appreciating up to 100%. His next-door neighbor’s house was bought for $620,000 in 2012 and is now on the market at $1.6mm.
That is absolutely crazy. We’re talking extreme price increases in a relatively short amount of time.
The reason I am telling you this story is to bring up two points:
#1: Leaving the casino while you’re up.
For anyone who has ever been to Las Vegas (or gambled at all), the classic story you hear is, “Oh, I was up a bunch of money and doing really well… and then I lost it all.”
So, even though I missed out on a lot more upside by selling the house in 2014, I am not currently worried about owning an over-valued asset. I took my gains and walked.
#2: The velocity of your personal wealth.
Could I have made more money by holding onto that house longer? Probably.
But with the money I did make, I was able to invest in areas I would have never been able to access.
It’s the simple concept of buy low, sell high. The trick is that you actually have to make the sale when prices get higher and not hold on until prices decline again.
If you can continue to buy under valued assets and then sell those assets once they have appreciated in price, then you are essentially compounding your gains.
Of course all of this is much easier in theory than in practice, as it’s easy to be critical of the past with what we know now.
For now, we can search for things that are cheap. Because we all know that there are plenty of expensive things out there.
I’ve got some ‘cheap things’ I’ll share with you soon.