We Make Money When We Buy, Not When We Sell

Initially I was surprised and confused when I heard about that sentence. It was said that we make money in property investment when we buy and not when we sell. I used to have an understanding that investing in property in same as investing in other instruments. I need to put some money, and I can rent out my property for cash flow. Furthermore I can also wait until my property price increased and I can sell it to make a profit. That was my initial understanding.

Today, it was the second or third time I heard about making money through property, getting rich from property. Something that reminds me about what I heard before. Today I become more understand the term “We make money when we buy and not when we sell”. Even though this is not common but let me try to explain in a very simple way.

For example, we buy a property with the price of $100,000. We buy the property because the sales person said that that property is built a good area where potentially is going to increase in price over the next few years. According to the seller, there will be some infrastructure build near the place where that property is going to be built. First, this is very common situation where we buy property in a hope that the property price will be increased in the future and we can make a profit out of it. However in this case we don’t make money when we buy, but rather we spent some money for the down payment. Furthermore, this kind of transaction has speculation factor rather than investment itself. So how then, can we really make money when we buy and not when we sell?

One of the simple ideas that can explain that is when we buy property below the market value (MV). For example, in certain area a 2 bed room apartment normally will cost $100,000. Now, there is a seller in that area that really needs money fast and wants to sell their property. Since that person wanted to sell property fast, he is willing to sell the property $90,000. Now, an investor who see that opportunity, quickly grab the opportunity and buy that property. In this case, the investor buys property for the market value of $100,000 with price of $90,000. In this transaction, the investor already makes money on paper about $10,000. If the investor can wait a little bit more patient, he can sell the property at the market price and without doing anything he make money out of it. This is a very simple idea of how to get rich in property, buying property under market value, and make money when we buy not when we sell.