It’s The Exact Opposite of How You Build Lasting Wealth
All appreciation is NOT the same. And it’s not all equal, despite the way everyone from the experts to the financial news guys throw around the term. The truth is, when it comes to real estate, there are two types of appreciation:
Forced and Automatic.
Forced appreciation is what we, as “traditional” real estate investors, were taught to focus on. Buy low and (hopefully) sell higher. Forced Appreciation investors only make money on the “spread” – the difference between what you’ve got in it, and what you get out of it – after ALL expenses are paid.
With Forced Appreciation your upside profit is limited. It’s transactional INCOME – not wealth.
Automatic Appreciation, on the other hand, is unlimited. It applies to any man, woman or child who owns or controls real estate.
It’s really important you understand the difference.
Forced appreciation is where you build an acquisitions funnel to find motivated or un-informed sellers. You cast a wide net, filter potential deals and try to buy properties below market. Once you have them tied up or purchased, you try to add value through things like rehabbing and marketing.
You “force” the appreciation and profits through your hard work and special skills. It’s what most real estate investing books and guru home study courses have been teaching for the last 30 years — tactics like pre-foreclosures, wholesaling, subject-to’s, probate, tax deeds, rehabbing and more.
There’s nothing wrong or hard about buying properties below market; it just takes time and money. It’s a job. You stop doing it, your income stops as well. It’s transactional income, not wealth building.
I’m going to go a step further, and say GENERALLY these forced appreciation strategies aren’t even profitable unless your tactics are in sync with your local market cycle.
Remember that big, successful Tampa FL wholesaler who lost just about everything when the market tanked? He did great when the market was appreciating, but got clobbered when the market went downhill.
Remember those other forced appreciation strategies mentioned in the beginning? Subject-to’s, pre-construction and lease options only work in appreciating markets, too, and they can drive you to bankruptcy in falling markets.
Do you see where I’m going?
If all these transactional income strategies only work in rising markets and do poorly in falling markets, then what’s really the main driver of your success or failure?
It’s the Market!!
Forced appreciation strategies can’t be done in a vacuum; they still need a vibrant market to succeed. You’ve got to know the local market cycles even if all you’re after is transactional income.
Thinking that forced appreciation strategies are the source of your success is no different than that Bantam rooster thinking his crowing is what makes the sun come up.
Automatic Appreciation is different…
It occurs when the value of your property goes up naturally or ‘automatically’ – just because of where and when you OWN or control it, not from anything you did.
Unlike forced appreciation, where you’re limited to the spread between your purchase and sale price, automatic appreciation has massive, unlimited upside potential.
Remember the 15 trillion dollars of wealth creation in the last up cycle? 99.9999% of that was AUTOMATIC appreciation.
Think of that $15 trillion in new wealth in terms of all the surface sand on Miami Beach. Now, go pick up one single grain of that sand – you’re looking at forced appreciation’s contribution to that $15 trillion of wealth.
All the money made from forced appreciation strategies would be like a single grain of sand. It’s insignificant and barely worth discussing, yet it gets all the attention. Ever since the advent of late night infomercials, investors have been taught to focus on the wrong thing; forced appreciation. It’s NOT where the money is.