| Investment Property: The Safe and Profitable Way |
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| Written by Cody Scholberg |
| Monday, 21 December 2009 14:00 |
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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.
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. Investment vs Speculation. Investment and speculation are quite different from each other. One relies on hard facts, and the other relies on chance and good guessing. Most so-called investors are actually speculators, even though they think they are investors. These people often spend a huge amount of time "researching." Research to them is reading market conditions and the opinions of experts and then trying to predict the future prices of their investments. A real investor's only concern about the future, on the other hand, is the price dropping; he or she wants to guard against this. So, a real investor looks for two things: safety and profit. If either of these things are not present and are not assured beyond a reasonable doubt, then he or she will not consider it an investment, but a speculative operation. Safety Property has two values assigned to it: the intrinsic value and the price. The intrinsic value is what the property should be priced, while the price is what the property is actually priced. Investors are more concerned with the intrinsic value than the price. They watch the price until it drops significantly below the intrinsic value, and then they buy the property. Afterwards, the price no longer concerns them. If a market is so inflated that there are no prices below the intrinsic values, you should move to a different area, as speculation is the only strategy available in those areas. Always remember that the market functions as a weighing machine in the long run; the price will rise to meet the intrinsic value. Also remember that it is only an estimate, it may not reach exactly the intrinsic value. Therefore, we should buy significantly below the intrinsic value, not just below it. Eighty percent or below the intrinsic value: this is the criteria we use when looking at price to determine if we should buy the investment property or not. This will give us a margin of safety. If the price of the home should drop in the future, we have a twenty percent buffer before we feel any impact. Sure, the price may be lower than when we bought it, but remember that we are concerned with value. If the price does drop more than twenty percent, the impact is lessened by our safety barrier. We must not rely on appreciation, for this is speculation. Predicting the future is impossible, as nobody is a fortune teller. Instead, we should use a strategy that assures us of a profit. 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. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Learn how to create wealth with rental properties and property investing. |