Why buying based on appreciation could set you up to fail
Today there is a sense that you can’t lose in the market. Many home buyers and investors are buying based on the anticipation of an increase in the future value of a property. But there is no tried-and-true method of accurately predicting the future value of a property. A market downturn is a matter of when not if. The safest and least risky investment strategy is to buy real estate based on its present day performance. If appreciation does happen – that’s just an added bonus. You shouldn’t invest based on speculation. Buying based on anticipated appreciation is not a sound investment strategy.
I buy based on the performance of rental property. I buy based on the Return on Investment TODAY, not what it might be worth in the future. You drastically reduce your risk with this type of strategy, which will help to insulate you from the effects of an inevitable market downturn.
Comments (1)
Some markets like California seem to have operated on the appreciation model for the last 30 years. The investors that I know who have really made wealth in real estate bought in appreciating areas and then...never sold.
I tend to buy properties with strong cash flow, but they are not in strong areas. It's workforce housing, nothing more.
We have entered somewhat of an overheated market in some areas, so it is a good time to realize that appreciation may be muted in some of these markets in the next few years.
Brian Ploszay, over 6 years ago