Investing vs. Speculating - There IS a Difference!

It can be easy for real estate investors, especially those who are new to the game, to confuse investing IN real estate with speculating ON real estate. If you’re not already certain that there’s a difference, take my word for it. These two concepts could not be more different. It may not seem that way to the untrained eye, but the first, done right, can systematically build wealth over time. While the latter may have the potential for a big payday, it also carries with it a significant risk.

To put it simply, investing in real estate is investing in what IS. Speculating on real estate is investing in what COULD BE. One of the great benefits of real estate is the relative safety in the investment. Unlike stocks, you’re able to acquire tangible assets that, at least in our market, rarely see big fluctuations. You can see what comparable houses have sold for, what they have rented for, and how long they were on the market before finding a new owner or tenant. These are based on what things are, today. Speculation in the housing market is the equivalent of purchasing a stock because rumor has it, it’s the next big thing. Most anyone with an email address has received a tip about a new penny stock that was about to experience explosive growth, and some kind stranger just felt it was his moral obligation to share this great news with you. Usually, these emails are quickly moved to the trash folder – as well they should be. For whatever reason, real estate speculation is rarely seen through the same pair of glasses as the penny stock.

That being said, it’s always good to know what the trends are in the areas you’re looking to invest in. Is it primarily owner-occupied? Is it primarily a rental area? Are the schools in high demand? Is the school system less desirable, etc. All are important factors, but never bet your money on what might happen in the future. When purchasing real estate, the possibility of upside should be the icing on the cake – never the cake itself. The cake is based on what kind of deal you’re getting today. Not what kind of deal it will be in the future.

When we look at a deal, we are looking for 3 separate, distinct profit centers and they should all be there and apparent from the start.

First, the down payment from our buyer. It is rare for us to not collect more upfront from our buyer then we spent getting into the property. Second, cash flow. Our monthly payment on the property going out should be less than our monthly payment coming in. Third, our backend profit when our buyer refinances or pays us off. With the difference in monthly principal paydown between what we get on our underlying loan with a lower interest rate and what our buyer gets on their loan from us with a higher rate and most likely higher balance, this number should go up each and every month.

I look at it as though our buyer deposits money into a savings account every month for us and in a couple of years we will withdraw the balance.

In the deals we look at, we want all three of these profit centers but will often go with a deal that only offers two. Each deal stands on it’s own as to whether we will take two but a deal that doesn’t have at least two of the three will not make the cut.

If there is any question at all on whether the deal will be profitable, we pass. This is investing…not speculation. The possibility of the area going through some type of development and property values increasing doesn’t interest me in the least. If that were to happen, great but we buy based on the numbers today. You should, too.

Remember that the most successful, long-term investors in real estate are marathoners in the game. They have a system, they pace themselves, and they do not sprint just because they feel like they’re reaching the destination quicker. They’re smarter than that, and anyone who hopes to build true wealth over time should be, too.

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