There are debates in the real estate world on which strategy is best when it comes to purchasing income producing property. Should you invest in a great property with lower cash flow, if any, and hope that the asset appreciates significantly over time? Or should you invest strictly for cash flow? Remember HOPE is not a strategy.
I personally have never invested in a property and bet on appreciation to save the investment. I know people in California who strictly rely on this approach. And I know there are some people that want to buy the best asset possible, in the best area, with the opportunity to appreciate. If you have money to park and don’t have to worry about a return on that money. Then investing this way may make a lot of sense to you.
However, if cash flow is important to you now. Then I would follow my advice and never rely on appreciation of a property to earn the returns you are looking for.
Here are five reasons I never invest where I am betting on appreciation to make the return worthwhile.
Asset prices can be highly volatile, and they can fluctuate significantly over short periods of time due to changes in supply and demand, economic conditions, or geopolitical events. If the market moves against the investor, they may be forced to hold onto the asset longer than they planned, or sell it at a loss.
Overpaying for assets:
Something I learned a long time ago in real estate in general. Is that you make your money when you buy the asset. Meaning, don’t overpay. If you overpay you will never make it up.
In the pursuit of capital gains, some investors may pay too much for an asset. If the market does not continue to rise at the same rate or if it experiences a downturn, the investor may not be able to recoup their investment.
Lack of diversification:
I only invest my money in real estate. So this one applies to me more than most people. And I am okay with that. When you invest in only one type of asset, sector or market it can expose the you to a higher level of risk because you are all in on one particular investment.
Trying to time the market and buy low and sell high can be difficult. Market cycles can be unpredictable, and it’s impossible to accurately predict the exact timing of a market upswing or downswing. Last year the fed raised rates seven times. This is almost unheard of. And the market is in the process of adjusting and in some cases correcting because of these rate changes.
Investing in income producing real estate is a long game. If you want short time wins. Then don’t put your money in real estate. Typically real estate will double every 12 years. Can you make money after five years on a deal. For sure. But hold on to that thing for 10 and you will crush it.
I recently sold two condos I bought seven years ago. I sold them for double what I paid for them. And they cash flowed the entire time I owned them. Plus all of the tax implications for the positive they provided for me.
Like I said earlier, the better the asset the lower the returns will be as far as cash flow is. That is just how the game works. But if you are looking for cash flow. And I think you should be. Then never rely on appreciation to make or break a deal.
To your success and your future.
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