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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.

Speculation versus Investment.

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

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.

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 property and property investing.