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When you go out to a party to meet a girl or a guy, you choose the friends you go with wisely. Should I go out with someone who is all-around more desirable than me in order to raise my status by being seen with them? Or should I go out with someone less desirable than me in order to raise my status as the cool one?
You can make the call in your personal life, but in real estate terms, you absolutely want to go out with the more desirable person.
Let me explain. In real estate, your property's value will increase if it is in an area of much more desirable homes, and it will decrease if it is in an area of less desirable homes. Therefore when you are looking at buying a home, it may be tempting to buy a huge house in a less desirable neighborhood because you always wanted a big house with a big yard, and in that neighborhood, you can afford those things. If that is what makes you happy, then go for it. However, from an investment standpoint, that is a bad move.
From an investment standpoint, it would make much more sense to take that money and get a more modest house in a much nicer area. You may not be able to afford the dream home you desired in that nicer area. But as a result of being around much more expensive properties, the value of your property will go up.
In appraisal terms, we are talking about the principle of progression and regression.
The principle of progression states that the value of less expensive properties will increase when more expensive properties come into the area. Thus, if your home is worth $500,000 and it is surrounded by $1,000,000 homes, the value of your property will go up.
The principle of regression states that the value of a more expensive property will decrease when less expensive properties come into the area. Thus, if your home is worth $500,00 and it is surrounded by $100,000 homes, the value of your property will go down.