Friday, August 28, 2009

Repairing Investment Property

We can do this by buying a home in need of repair. Homes in need of repair do not, as a class, always provide profit – certain criteria must be met. First, find out the new construction cost per square foot of the area which you are buying, and then find out the cost per square foot of the home which you are buying. Find the difference. Now, make a good estimate of the repair costs. The repairs needed should only be surface-level; the foundation of the home should be solid. The repair costs should be half or less the difference. This way, for every dollar you put into the home, you are receiving two (or more) back. The great thing about this strategy is, if there is any appreciation, you will still benefit from it. But, if there is no appreciation, we have still assured ourselves a profit.

This repair cost method combined with our margin of safety concept provides us with an investment that is both safe and profitable beyond a reasonable doubt.

Assuring a Profit with Investment Property

There are ways of assuring yourself a profit, as well. Let us first talk about the profit strategy of most real estate investors. Most real estate investors focus on appreciation of the home to make their profit. While appreciation can and usually does happen, we consider this unsound investment to buy based off of what we think will appreciate. There is no way to measure or predict the appreciation, since it is just that, prediction. There are no fortune tellers in this world. Therefore, the only thing about the future we are concerned with is a drop in value, which we have already protected against. We must, then, find another way to profit – a way that assures us a profit.

Margin of Safety with Investment Property

Price and intrinsic value converge over the long term. Remember that everything is just an estimate. You do not want to buy just below the intrinsic value, for it may never reach exactly the calculated intrinsic value. However, if you buy significantly below the intrinsic value, the likelihood of the price going up is very high.

Therefore, we do not suggest any investor buy below eighty percent of this intrinsic value. This serves two purposes: profit over the long term and a margin of safety. Since the price will converge with the intrinsic value over the long term, the price will go up; thus, you will profit. Perhaps more importantly, this excess in value acts as a cushion, or a safety buffer, against any decline in price. The price can decline up to 20% below the intrinsic value before you are losing any value. Therefore, you are protected against most declines in price; and, in the event of a colossal drop in price, the damage to you is minimized.
While there is not much anyone can do if the price drops because of a catastrophic event, there is much we can do for normal drops in prices. You must first know what the intrinsic value of the property you are examining. The intrinsic value is the value of what the property should be worth, not what the price is. This intrinsic value is based off the earnings power of the property; it is one hundred times the monthly income. Buying below this intrinsic value is the sign of a real deal, as we buy based on value, not price. Some markets may be so inflated that there are no properties available whose prices are this low. These areas should be avoided; although one may make profits in these markets, it becomes investment largely based on opinion, not fact.

Intro to Investment Properties

A layperson’s best bet for making money is property investment. Although it is not difficult to do, it does require intense, hard work, high levels of discipline, and patience. Working hard, however, is not sufficient, for you must also work intelligently.

Speculation vs Investment

Investing is not speculation. Speculation relies on chance for a profit. Most so-called investors are actually speculators, but they think they are investors. An investor relies on hard facts to base his or her decisions. There are two criteria that must be met in order for a security or other vehicle to be classified as an investment: safety and profit. Both of these must be assured beyond a reasonable doubt. Anything based on opinion must be considered speculation.