Maybe you’ve heard the phrase about water seeking its own level. The idea holds true in a variety of contexts, but for the sake of today’s discussion let’s say that water seeks the lowest level. We can apply this thinking to stock and precious metals markets and even to real estate. Money follows the same principle—when prices in one market swing lower or higher, expect adjacent markets to react with a move in the same direction, either up or down.
When we affix a value to a property, we must consider the Land to Improvement (LTI) Ratio. When you’re purchasing property, you should bifurcate your thinking. Don’t consider an income property as a single entity when it comes to value. Remember that the land is worth something and the structure, or improvement, is worth something else. Rarely will the value be split down the middle. And since we are only able to insure the value of the structure, the best bet is to choose income properties in which the land is entirely or nearly free. Invest for improvement value and not land value because those are the markets that boast more potential for cash flow. Low land value markets are low risk markets.
Hint – this is NOT southern California. Early in his investing career, Jason Hartman had the unpleasant experience of a property with wildly fluctuating value due mainly to the value of the land rising and falling.
Income properties are not perfect investments, though we love them. But everything in life has the potential to become a kind of comparison. As you’re evaluating your investments, ask yourself—compared to what? Other types of investments (gold, silver, stocks, bonds) get poor tax treatment, no financing, no leverage, no income. They’re also highly speculative, so by comparison—real estate is easily the better investment.
Here’s the difference: real estate allows you, as the controller of the investment (a direct investor) to feel every little bump along the way. Investments in which money is pooled (stocks, bonds, mutual funds) experience these same bumps, but you probably aren’t feeling them as they happen, and have no warning when you fail to get a good return.
With income properties, you’re going to feel the bumps, but you’re also going to make money.
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The Jason Hartman Team