Gypsy Camp Blog

The layperson, or a non-businessman, has his or her best chance at money money through the field of real estate. This is because real estate is the easiest field in which you can acquire other people’s money, and it is the field in which a total loss of value is least likely.

Speculation versus Investment.

Speculating and investing are two different things. The first is based upon chance, much like a game of poker, while the second is based upon factual, quantitative data. Speculators can be just plain old gamblers, or they can be people who spend hours upon hours doing research. The problem with their research, however, is that it is non-quantitative data; therefore, their final determination is based upon their opinion and the opinion of others. An investor, on the other hand, makes sure that both safety and profit are as definite as possible. If these two factors are not there, or there is not enough data to support them beyond a reasonable doubt, then the investor considers the operation to be a speculative one.

Safety

Any piece of property has an intrinsic value; this value is what the property should be worth based on the amount of income it produces. It should be one hundred times the value of the monthly gross income. We always want to buy below this intrinsic value. If the market in your area is so inflated that there are no prices even close to the intrinsic value, then you should look elsewhere. While there may be many opportunities for profit in those areas, the prices are supported largely by emotion and market sentiment and not hard data.

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.

We must not rely on appreciation, for this is speculation. Predicting the future is impossible, as nobody is a fortune teller. Instead, we should use a strategy that assures us of a profit.

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.

Learn how to create wealth with the investment properties guide and property investing.

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