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The best way a layperson can make money is through rental property. Not only does it have the least risk in a total loss of value, but it is the easiest industry for someone without experience to obtain the use of other people's money.
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
The intrinsic value of a property is what a property should be worth in a perfect world. This is based off the earning power of the property and not the public's attitude. One hundred times the monthly income is a good measuring stick for approximating the intrinsic value. Investors are concerned with value more than they are price. They will buy when the price is below the intrinsic value. There are some markets where finding a deal like this is impossible. In these cases, search somewhere else, for these investments would be mere speculations.
The price that the property is bought at must be significantly below the intrinsic value, otherwise the investment is no good. Remember that the intrinsic value is not a fixed value, but a general ball park. If one buys something in a ball park substantially below the intrinsic value ball park, then one is sure of getting a good deal.
We have set the rule that one should not buy property except for property that is eighty percent or below the intrinsic value. This functions as a safety buffer for us. It is unlikely that the property will drop more than twenty percent in value in the period that we own it. But, if it does, we have a twenty percent "cushion" to lessen the damage.
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.
To assure us a profit, then, we will find a home that is structurally sound but in need of surface-level repairs. The price paid per square foot should be subtracted from the price of one would pay for new construction per square foot. Then, we estimate our repair costs, which must be half or less of the difference we just calculated. This serves to double or more our money upon repair. By buying property with this margin of safety and this repair strategy, we can be sure beyond any reasonable doubt that our investment will be both safe and profitable.
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
The intrinsic value of a property is what a property should be worth in a perfect world. This is based off the earning power of the property and not the public's attitude. One hundred times the monthly income is a good measuring stick for approximating the intrinsic value. Investors are concerned with value more than they are price. They will buy when the price is below the intrinsic value. There are some markets where finding a deal like this is impossible. In these cases, search somewhere else, for these investments would be mere speculations.
The price that the property is bought at must be significantly below the intrinsic value, otherwise the investment is no good. Remember that the intrinsic value is not a fixed value, but a general ball park. If one buys something in a ball park substantially below the intrinsic value ball park, then one is sure of getting a good deal.
We have set the rule that one should not buy property except for property that is eighty percent or below the intrinsic value. This functions as a safety buffer for us. It is unlikely that the property will drop more than twenty percent in value in the period that we own it. But, if it does, we have a twenty percent "cushion" to lessen the damage.
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.
To assure us a profit, then, we will find a home that is structurally sound but in need of surface-level repairs. The price paid per square foot should be subtracted from the price of one would pay for new construction per square foot. Then, we estimate our repair costs, which must be half or less of the difference we just calculated. This serves to double or more our money upon repair. By buying property with this margin of safety and this repair strategy, we can be sure beyond any reasonable doubt that our investment will be both safe and profitable.
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