Real Estate Speculating? Know When To Get In and When To Get Out
Are you struggling to create cash flow with your investment property? Perhaps you are struggling to find cash flow property worth investing in. Often the challenge is you are looking at speculative real estate investments and hoping to make cash flow.
I know for me, I was just 15 when I bought my first investment property. I did not realize it until many years later that what I bought was called a speculative investment. Go figure, a 15 year old buys investment property and does not know what type of investment property he bought.
Oh, I knew it was going to be a great investment and indeed it was. I bought a city lot of land and made a 55% profit in just 3 years. It was a great investment that falls into the category of a speculative investment
Based on many conversations with many new investors (and my own personal beginning), I felt there was a big need to create clarity as to the types of investments that are best suited to accomplish particular goals. To do this, of course, requires understanding of the different investment types. The one we are talking about here of course is the speculative real estate investing so let’s break it down.
To speculate is to anticipate a great return. This is the most risky and possibly the most rewarding investment and as the saying goes, the bigger the risk, the bigger the reward. This statement gives fuel to the greedy as well so beware…in absence of a successful set of circumstances the opposite can happen. These risks of course can be mitigated with proper diligence. Speculative investing is very lucrative and does not have to carry a lot of risk if indeed you do advance diligence to insure preparation meets opportunity.
The bigger the risk the bigger reward.
Speculative investing works best when a market is positioned at the end of a Sellers’ market. After this seller market, the pendulum begins to swing the other direction and prices begin to fall. The time to speculate in real estate is when markets have finished their decline and have actually started to rebound. The caution is to make sure you do not start speculating before the declining prices have finished declining.
This again is where location in real estate comes into play. At any given point in time, there are markets that are better positioned to accommodate this speculative investment than others. It is imperative to find markets that are transitioning from a seller’s market to a buyer’s market.
Transition triggers to watch for:
- new construction is starting to get abundant
- financing is easier to obtain
- businesses and jobs show signs of a slow down
- demand and prices of construction is edging upward
- speculators are starting to buy
When a market is positioned correctly, the speculator has the best chance of capitalizing big-time on a speculative investment. These speculative investments can come in many forms and all of them are betting on one primary objective. Buy a property at a low price with anticipation of selling in a short amount of time for top dollar.
Here are a few samples of speculative investments that seasoned investors find to be lucrative:
Buying new construction at the beginning of Phase 1 to the new development. When a large development is underway, speculative investors cash in big by buying early. They rent for a short amount of time, 6 to 12 months, and as the development builds out into its second, third and possibly fourth phases, everyone now wants a new house in this subdivision. Prices have gone up considerably from Phase 1 and new buyers are eager to get moved in. Many do not want to wait for a new house to be built and will find your home to be of great interest to them. Never invest in the final phase of a construction project, you want to be in on the first half. Builders purposely price the first phases cheaper with anticipation of raising prices during each phase.
Purchasing Raw Land
Purchasing land is another favorite of the speculator. Using the above example, if the developer allows the purchase of a plain vacant (unimproved) lot this can be huge. Often a seasoned investor will purchase the land. This is a much smaller investments and as the lots get sold off, the demand will become stronger and stronger for the remaining lots. The Investor can then sell his/her lot at an increased price. This, believe it or not, was my first investment strategy at age 15. It worked like a charm and I made a 55% increase to my purchase price in 3 years’ time.
Of course, buying acreage that is sought after by a developer can be even more lucrative. When you acquire a larger parcel of land and the demand for new housing is strong, you will want to market this to a developer. To increase your payout, you will want to do the legal work of getting zoning approval and change the use of the land from its existing status to the status of multiple residences per acre. This is a tactic that is highly profitable and one that should only be done with proper guidance and experience. If this sounds interesting to you, you will want to do your diligence and learn more about the process of zoning changes. The diligence upfront may generate massive rewards.
Fix and Flips
Many investors do well by buying s distressed property, repairing the damages or simply updating the house and selling for a profit (fix & flips). Where most new investors go wrong on this strategy is when they try to perfect the house to the standards they would want to live in. The fact is, you will not live in it so do not waste your money putting in the extras that will not generate a large return on the investment. You want to make the home move in ready. Start with the outside to make it look great and grab the attention of the people who frequently drive by the property. Then put a for sale sign on it. Finish up the inside to make it move in ready, and by the time you are finished, you should have found a ready willing and able buyer that can give you a nice profit.
There are many examples that I could give on speculative investing but I believe this gives you a good snapshot. When being purposeful, you can see how the proper location along with proper market positioning is key to capitalizing on this investment strategy.
Real Estate Speculating Wrapup
When being purposeful with your real estate speculating you can make a great fortune while mitigating your risk. The most dangerous aspect of real estate investing is NOT paying attention to the changing tide. Real estate markets are always changing and the risk comes from not getting in and getting back out while you are still in a growth or sellers’ market.