The best way a layperson can make money is through rental property. Not only does it have the least risk in a total loss of value, but it is the easiest industry for someone without experience to obtain the use of other people’s money.
Speculation versus 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
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.
Relying on appreciation for profit is a speculator’s strategy; as investors, we think predicting the future is impossible and should not be relied on. If appreciation happens, so be it; we will enjoy it. But, we want to be sure that we will profit without it.
By buying structurally homes which are in need of repair, we can assure ourselves a profit provided we follow this criteria: The price per square foot of newly constructed homes should have the price paid on the home subtracted from it. This difference needs to be double the estimated repair costs, so that you can spend one dollar and receive back two. With this strategy, we are assured of a profit; if there is any appreciation, we still benefit from it. Also, we are protected against declines in value by our margin of safety.
Learn how to create wealth with investment properties and rental real estate.
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