Spoiler alert: although money can be made with appreciation, this is NOT the main reason anyone should get into real estate investing.

In my previous post in a series explaining profit centers of rental properties (Cash Flow: Profit Center 1 of 7), I explained the number 1 reason everyone SHOULD invest in real estate. Many inexperienced investors have a “theory” or hope that any particular property will become much more valuable over time. While this is hopefully true, it’s not guaranteed and is purely speculative. Speculating in real estate is a dangerous game to play.

Appreciation, in terms of real estate, is simply the increased value of a property over time. If I bought a property today for $400,000, and in 10 years I was able to sell the property for $450,000, that means my property appreciated by $50,000. Many factors can influence a property’s appreciation – additional parks, businesses and services, increased development, positive economic growth factors, public transit upgrades etc. A property’s appreciation basically increases as the demand to live in that area increases.

Savvy investors will buy undervalued properties in areas they know are planned for growth. Property sales will increase when news drops of upgraded public transit plans. In Ottawa, Canada, when news broke they were going to develop a new LRT system in the city, property values near the proposed route skyrocketed. Investors who acquired properties early on will reap the benefits once the system is completed. Not only will the value of their rental properties increase, but they will also be able to charge premium rent as demand for housing increases along the public transit route.

When things go as planned, appreciation is great. What happens when things go wrong? Using the same example above in Ottawa, what could happen if I predicted wrong? Say I learned about the new proposed LRT route and quickly purchased a property nearby for $500,000 with the intention of selling it off 5 years later after completion. I run the numbers and get input from agents and brokers. The numbers indicate I could sell for $600,000 in 5 years!

So I purchase the rental property, but it doesn’t cash flow. It actually costs me $300 out of pocket each month to pay all the expenses. I say to myself it’s ok because losing $3600/year ($300×12) will still be worth the $100,000 payoff in the end! 2 years later and half way to completion, the contractor goes out of business or they find out they need to re-route part of the rail system due to unforeseen circumstances or the courts get involved and stall construction or a meth lab is discovered 1 block away from my property.

All of these things can happen and would be a nightmare for my investment if I purchased solely for the appreciation. Each month that the project gets delayed is another $300 lost. That may not be such a problem…but what if the route needs to change and no longer goes in front of my property? The value of my property will decrease dramatically overnight….as would public knowledge of a nearby meth lab! The value could even drop below what I paid for the property!

In summary: None of these events could have been predicted. This is why investing on speculation is dangerous. It is imperative to invest in a rental property that makes money as quickly as possible. It doesn’t matter if it’s a buy and hold or a flip. Make sure you get your investment to make money as soon as possible. I will not look at a property that does not cash flow from the first month.

If you want to team up in some hands-off real estate investing that can product income immediately, contact me and I’ll show you how we do it.

See you on the beach!

Mark