Today I want to talk to you about the difference between investing and speculating.
Late night TV shows and radio advertisement promises not withstanding, it is very easy to get caught up in the excitement and speculate that anything you purchase here will go up in value. “All real estate in South West Florida is increasing is value” may or may not be true, and I would venture to say that if we are patient enough 90% of the time this IS true, but 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. The market conditions indeed are actually stable to slightly bearish, with pockets acting bullish.
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 in the past here in Florida. Not so much lately, however.
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 at three steps of the way:
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 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 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 buy “turnkey” condos when they are buying a second home With income property this means increasing the rent. You can also improve the strength of a property -by assuring that it will be bankable, for example).
Other ways to improve:
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.