Your Investment Must Cash Flow
You should never acquire an investment property where your profit is based on an expected future price.
I have seen some investment proposals where the promoter is pitching deals that even have a negative cash flow now … but a high return later. That higher return is based on expected appreciation and a higher price.
What if that appreciation never happens. Or worse, what if the property goes down in value like so many properties have in the last couple of years. The idea is that you will sell your property for a higher price and that’s how you will make your money.
Another way some investment deals are structured is that they show the return on investment based on an after-tax calculation where the property is depreciated and creates an additional virtual expense that can increase your net return … at least in the short term.
Make sure you know your exit strategy prior to using any kind of depreciation strategy.
A very common “future price” investment type is a pre-construction deal. These investments are very common in more populated areas and are usually part of a condominium development.
The way it works is that the developers pitch that you buy now, before it is built, and the property will be worth more when the construction is completed. This sometimes works and a lot of people have made money doing this.
A lot of people have lost money too.
For example, some developers ran out of money and didn’t sell enough units to complete the construction of the building. Or prices dropped dramatically, and the investors weren’t able to get the final financing for their units because they are now worth less than when they originally signed the deal.
One exception to this might be Lease Options.
You acquire a property and expect to sell it your Tenant Buyer at a higher price. The difference with Lease Options is that you are getting paid your profit in monthly payments. So, if the property doesn’t appreciate as planned, you still made a portion of your profit and you can always rent it out if your Tenant Buyer doesn’t exercise their option to buy.
Buying an investment property and expecting to make money based on a future price is pure speculation.
There is a lot of risk involved. You want to make sure your property cash flows and provides a good rate of return every month and every year.
Now that’s investing.