TO INVEST IN REAL ESTATE OR TO SPECULATE IN REAL ESTATE
October 18, 2016 By Larry Arth
I am always amazed at how many people say they struggle to find good property worth investing in. Over the years I have come to discover that perhaps the biggest reason for this is many people are not clear themselves what they are looking for.
Quit chasing the shiny object
The number one thing that keeps people from accomplishing their goals is they are too busy chasing the next shiny object. They hear about this investment strategy and that speculation strategy and the confusion has sprung. Analyzing one against the other is impossible as they are two different businesses.
Do you want to invest or do you want to speculate?
The property that an investor is looking for is different from the property that a speculator is looking to buy. To find the best property for you, first you want to understand if you are a real estate investor or a real estate speculator. All too often these terms are used synonymously.
To Do: Write down on paper what you expect to buy as your ideal investment
It may look something like this:
You will buy a property and rent it to a tenant with anticipation of enjoying an annual return of 8,9, or 10% per year.
Perhaps a property such as a 3 bedroom 2 bath home with a garage. I will hold it for 5 to 10 years. I will finance it and expect to get a positive cash flow each month of $500.
Or it may look something like this:
You will buy a cheap property, You will fix it up and turn around and sell it for a quick profit.
Perhaps buy a house that is distressed so you can get a great deal on it. You will fix it and modernize it and then sell it to make a $50 profit within a 2-4 month time.
In both scenarios you are looking to benefit and make money from these ventures.
You will quickly see the differences however. One model is tied more to the economics of the business while the other model is tied more to the price of the business.
It is the investor who wants to do a thorough analysis to determine safety of the principal while producing a satisfactory return. A business model that does not require this analysis is typically a speculation.
Another way to look at it is to think of it as to the length of holding period. Long term buy and holds are typically investments and short term holds and then quickly sell are typically speculations.
To that note, the buy and hold model is typically considered a passive investment as there is less work involved (mostly managing the operations). While the speculations are often considered an active investment as there are lots of daily interactions required to insure a good profit.
Why is this so important to distinguish between the two?
To truly accomplish your objective you want to know exactly what you want in order to find what you want and to be effective at it. You want to clearly define these criteria to your sphere. Your realtors, tradesmen, attorneys or anyone you interact with.
Creating this clarity helps you to understand it and communicate it to others and they can and will be on the lookout for you to accomplish these objectives.
So remember, avoid chasing the shiny object and be clear what your objective is, so you can accomplish your goal. Don’t get distracted by the next thing coming along.