IS REAL ESTATE A SPECULATIVE INVESTMENT?
October 14, 2014 By Larry Arth
I always get asked the question, “Is Real Estate a Speculative Investment?” While almost any investment is speculative in nature, there are highly speculative investments and then there are investments that are a lot less speculative in nature. As the ole saying goes, the bigger the risk the bigger the reward. Highly speculative investments can pay big rewards. The flip side is the investment can go very sour as well.
Big Risk Takers And Speculative Investments
Big risk takers are probably not reading this post on speculative investments. They tend to be seasoned investors who understand the risk and can afford the gamble of the loss. Unless you can afford to lose thousands or perhaps tens of thousands and even hundreds of thousands of dollars, you will want to secure investments that are less speculative and have reduced risks.
Safe Investments With Less Speculation
Speculation tends to be the act of investment with hope of high returns. Typically these high returns are anticipated equity or value growth. A safer way is investing with pre-determined returns. Investing for equity or value growth leans toward the speculative side. When you invest for more pre-determined cash flow during the hold time, your investments are secured by the monthly returns you get from the investment. While you still anticipate a nice equity growth the cash flow alone makes for a safer and more predictable investment.
There are lots of ways to reduce risk and invest in properties with safe and measurable returns. While the number of things to consider is endless you will be well served remembering these
5 Things To Watch For To Reduce Your Risks
• Buy properties in emerging markets: Market locations that are poised for growth will provide much safer and predictable growth than a market that is overheated. The next four are things to look for when investing in emerging markets:
• Buy within the path of progress: Every city worthy of investing in has a direction where the city is growing (the path of progress). When the city grows to the north because of new businesses that generate jobs, you want to be investing in that direction. The opposite end of the city may appear to have better deals, but these become more speculative as you may encounter stagnant prices there as everyone wants to move to the progress area.
• Buy within the sweet spot: The sweet spot is an area that represents the house that will not only be the most highly sought after type of home in a chosen city, it will also be priced within a price point that people can afford to buy and afford to rent. To find this type of property look for the area’s median price house. This median price house represents a property that the largest number of people can afford to rent today and to purchase tomorrow. (The sweet spot)
• Buy property in markets that are considered undervalued: In its simplest definition, a regular market means that you should be able to purchase a house and make payments on it for 1/3 (33 percent) of your monthly income (based on a median income). When you find a market where the median price house can be purchased for less than 33% of a median income, you have an undervalued market. The probability of growth in this market is very safe as it is very affordable.
• Job growth: when a market has lots of jobs and a diversity of jobs, the potential for equity growth to your property grows exponentially. Markets with job growth tend to attract population growth as well and the economy here will flourish.
As you can see with each of these attributes you have reduced risk to your investment growth. When you encompass multiple attributes or preferably all the attributes you have nicely reduced your risk of speculation. Being purposeful and diligent when buying an investment property is key.
Bonus: Here Is Another Risk Reducing Measure:
Buy turnkey properties: Turnkey property companies typically only exist in safe growth markets. Everything they do is based on economies of scale. As these companies buy 10, 20,30 and more properties per month they know how to do it and do it right. They know the right areas to buy and they have their own rehab crews at their disposal. Title work and liens is a risk that any investor faces when buying property that has been distressed. These turnkey companies know how to navigate through all this and they take all the risks of the unknowns. When you buy a turnkey investment you not only buy a clean and clear title to a property but a whole management system with property management and the entire real estate power team in place.
If you are looking for true “turnkey properties” that are not listed in the MLS, check out the FREE Equity Builders Real Estate Investment Buyers Group today!