Property investment is perhaps the best way for a regular person to make money. It has the least risk, and it is the easiest field to obtain financing in. Though sound investment concepts are fairly simple, there is much confusion surrounding what is and what is not sound investment.
Speculation vs Investment.
Speculation and investment are very different. Speculation relies on chance to make a profit. Most people who “invest” actually just speculate, even if they do tremendous research before buying any “investments.” This is because these people usually read opinions of the “experts” and try to make their own prediction of the future. Predictions, of course, are largely chance-based. A true investor relies on hard facts when making his or her decision. There are two things that must be present for an investor to consider something an investment: assurance of safety and assurance of profit.
Safety
Any piece of property has an intrinsic value; this value is what the property should be worth based on the amount of income it produces. It should be one hundred times the value of the monthly gross income. We always want to buy below this intrinsic value. If the market in your area is so inflated that there are no prices even close to the intrinsic value, then you should look elsewhere. While there may be many opportunities for profit in those areas, the prices are supported largely by emotion and market sentiment and not hard data.
The price that the property is bought at must be significantly below the intrinsic value, otherwise the investment is no good. Remember that the intrinsic value is not a fixed value, but a general ball park. If one buys something in a ball park substantially below the intrinsic value ball park, then one is sure of getting a good deal.
Therefore, we have said that investors should not buy property unless it is eighty percent or below the intrinsic value. This will give us both a margin of safety and profit in the long term. We have discussed that the price will go up to match the intrinsic value over the long term; this is good if you plan on holding the property for a period of twenty or more years. More important, however, is the margin of safety concept. This difference between the intrinsic value and the price paid is the margin of safety, and it functions as a cushion to lessen the impact from, or completely protect against, any decline in price.
To assure ourselves a profit, we must not rely on appreciation, for this is us relying on chance. As nobody has a crystal ball, this is a silly strategy. Let us find another way.
To assure us a profit, then, we will find a home that is structurally sound but in need of surface-level repairs. The price paid per square foot should be subtracted from the price of one would pay for new construction per square foot. Then, we estimate our repair costs, which must be half or less of the difference we just calculated. This serves to double or more our money upon repair. By buying property with this margin of safety and this repair strategy, we can be sure beyond any reasonable doubt that our investment will be both safe and profitable.
See how you can get rich with investment properties and property investing.
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