The Absolute Maximum Theory Applied To The Non Real Estate Mogul

1269 words - 5 pages

When an individual comes into a large sum of money, whether through the lottery, inheritance, or some other sudden financial event, they are most commonly asked the following proverbial question: “What are you going to spend it on?” Aside from going to Disneyland, the key word “spend” should send alarm bells off in anyone’s head that is interested in the longevity of their newfound income. Unfortunately, many middle class Americans who are instantaneously shoved into some amount of wealth forget about the possibilities for investment. Which of course, leads to the numerous horror stories of mismanaged money, making many millionaires’ mansions moot. Even if one were to decide to invest, he/she would have to wade through the murky waters of the investment industry and avoid being pulled under by “a friend's mink ranch or the nutty uncle's anti-gravity machine” (Reeves). However, in this scenario, we are lucky enough to be forced into a housing investment, like a father giving his son allowance and then deciding for him what to spend it on. It is one less decision that we’d have to make, and in fact, keeps us safe from buying that yacht we never knew we wanted until just now. Given these conditions, the new question becomes, “Are you smart enough to invest this money into a home properly?” The difference between a yes and a no to this question is a theory that I will propose as the home investment “absolute maximum theory,” and the “one step up” approach.
This theory only applies to the current state of the housing market. The reason is because when home prices are dropping by over ten percent on average (cnbc.com), dumping money into renovations for a foreclosure becomes exponentially tricky. The investor runs the risk of over-spending on improvements that will not increase the price of the home enough to cover what was put in. This isn’t to say that you shouldn’t renovate. After all, how would you turn a profit on a home without improving it, other than simply sitting on a foreclosed home for seven years while the market recovers? Rather, it is about finding the sweet spot, the perfect upgrade that impresses potential buyers just enough to sell the home reasonably. What makes this so crucial in the market’s current state is that many homes in the very same neighborhoods are being put up for sale, cookie cutter neighborhoods where the homes look like “little boxes made of ticky tacky” (Reynolds). Making minor changes to a property that began by looking similar to a nearby one can go a long way when it comes time to sell.
The term “absolute maximum” is used mainly in linear algebra and calculus but is quite simple. It refers to the highest point that a line on a graph can reach. In this case, we won’t be crunching numbers, but visualizing a graph with a bell curve. Humans think linearly, as to say that we think in straight lines. However, in this case, we need to envision a parabola that opens down, which essentially looks like an upside down...

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