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Investor or Speculator?

Investing in Real Estate or Speculating in Real Estate – What is the difference?          
 

These are pretty heady times in real estate here in Florida. You know if you get my regular emails that I am passionate about real estate down here and get frustrated about my inability to communicate to my clients how truly exciting the real estate market is. But today, I want to talk to you about the difference between investing and speculating.

I want you to be an informed buyer and not get caught up in the buying frenzy.

 

It was very easy a few years ago to get caught up in the excitement and speculate that anything you purchase here in Florida will go up in value. “All real estate in Southwest Florida is increasing in value” was a mantra that we heard in the heady times of 2004, 2005 and 2006. For those that got our early, this was perhpas true. Those that know me don’t call me a patient man, and I feel much better when I can control the odds in my favor.

 

Speculators buy real estate with the anticipation that prices will continue to rise. Speculation is the process of buying real estate based solely on its current market price in the hope that future market prices will be higher. Speculators have made a great deal of money over the years in Florida. In the past five years, they lost.

 

Investors, however, buy property at or below its economic (or intrinsic) value, and while owning tend to improve value. Investors study the market and look for ways to improve the return that they will achieve. They improve their “odds” and their return during three key steps of the process:

 

1.    When they acquire the property.

2.    While they own or control the property

3.    When they sell.

 

1.    When Acquiring

 

Price. We can see the past trends and make some assumptions about continued market appreciation. Buy at prices that are either below market or PREDICTABLY will be so (like in a planned development with programmed price increases). It is often said that real estate investors make their money when they BUY, not when they SELL.

  • Buy premium. Low priced properties are low priced for a reason. The high-demand properties now will most likely be high-demand later as well. In other words, when you can, buy the best (on the water, at the top, etc.)
  • Control. Try to control the property for as long as possible before buying either with due diligence periods or pre-construction periods
  • Use leverage. This will increase your return
  • Make an informed decision and use experts to guide you
  • Terms. If borrowing, pay less for your money.

 

 2.    When you own

  • Improve. With a condo, this may mean upgrades, improvements and furnishings. Buyers like to purchase “turnkey” condos when they are buying a second home. With income property, this means increasing the rent.


3.
    When you sell
  • Timing is everything
  • Lower your selling costs (commissions etc.)
  • Don’t be greedy.
  • Use an expert
  • Try not to pay taxes (1031 exchange)

 

 

Let me be clear – there is nothing wrong with speculating in real estate. But I prefer that you become an investor.