Why Real Estate Appreciation is Not Your Friend
The only saying about buying real estate investment property that we hear more than "Location, location, location, is that real estate always goes up in value in the long run. After all, "They're not making any more land."
This, although true in most cases, does NOT mean that your best strategy is to buy and hold property until it goes up in value. In fact, I don't believe you should be dependent on real estate appreciating at all.
The reason is that if you rely on appreciation to make a profit, what will happen to you if prices don't go up? You make nothing, or could even lose money if values go down.
Just the closing costs you pay to buy a property would make you upside-down as soon as you've bought it, not to mention the closing costs you'll have when you sell it.
The solution, then, is to buy in such a way that you do not have to rely on appreciation to make money. In other words, create a rule that you will only buy properties far below market value. I wouldn't buy any property for more than 80% of what it could sell for in great condition, minus any repair costs you may have.
Right now, I can hear some people who are reading this complaining and griping already.
“But no one will sell you their house for less than it’s worth! They’d have to be crazy!”
I promise you that not only can it be done, it should be done.
In every location and in every real estate market, there are sellers who just want to get rid of their house, even at a loss. Perhaps you know someone who has been in that situation. It happens all the time. If you get good at finding these property owners, you won’t have to worry about real estate appreciation and can receive your profit from either selling right away, or buying and holding for the long run.
If you follow this rule, you will be far more likely to create large profits in real estate, both now and in the future.
This, although true in most cases, does NOT mean that your best strategy is to buy and hold property until it goes up in value. In fact, I don't believe you should be dependent on real estate appreciating at all.
The reason is that if you rely on appreciation to make a profit, what will happen to you if prices don't go up? You make nothing, or could even lose money if values go down.
Just the closing costs you pay to buy a property would make you upside-down as soon as you've bought it, not to mention the closing costs you'll have when you sell it.
The solution, then, is to buy in such a way that you do not have to rely on appreciation to make money. In other words, create a rule that you will only buy properties far below market value. I wouldn't buy any property for more than 80% of what it could sell for in great condition, minus any repair costs you may have.
Right now, I can hear some people who are reading this complaining and griping already.
“But no one will sell you their house for less than it’s worth! They’d have to be crazy!”
I promise you that not only can it be done, it should be done.
In every location and in every real estate market, there are sellers who just want to get rid of their house, even at a loss. Perhaps you know someone who has been in that situation. It happens all the time. If you get good at finding these property owners, you won’t have to worry about real estate appreciation and can receive your profit from either selling right away, or buying and holding for the long run.
If you follow this rule, you will be far more likely to create large profits in real estate, both now and in the future.
Comments (6)
I agree that one should buy properties that will cash flow, but I have found appreciation to be a very good friend. I would not be were I am today without appreciation.
Account Closed, about 15 years ago
I agree...But it is also where potentially big fortunes are destroyed.
Bryan Hancock, about 15 years ago
Good point but appreciation is where big fortunes are made.
Don Konipol, about 15 years ago
You need to strike a balance with buying properties below market value and buying SOME properties in select locations that are LIKELY to appreciate. The trouble with buying all properties at a discount is that those that are most likely to appreciate generally can't be purchased at a discount. By definition, these properties are easier to sell and are less likely to be distressed. The "appreciation vs. cash flow argument" is misguided IMO. Both are fine if done properly as part of a holistic portfolio-based strategy for growing wealth long term.
Bryan Hancock, over 15 years ago
Thank YOU. I will admit, though, there is something to Ken Wade's premise that if you identify the places in the U.S. that have begun appreciating like crazy, it makes sense to invest there instead of where you happen to live.
Alan Brymer, about 16 years ago
Thanks for reinforcing the notion that appreciation is something that shouldn't be counted on by investors, Alan. Too many people are out there encouraging "investing" in appreciating markets, when what they are really advocating is gambling.
Joshua Dorkin, about 16 years ago