Where Real Estate Investing And Speculation Collide

Where Real Estate Investing And Speculation Collide



Where Real Estate Investing and​ Speculation Collide
Some uninformed folks would describe someone who rehabs distressed property as​ a​ speculator or​ even a​ property speculator .​
Don't be fooled! There is​ a​ VAST CHASM of​ difference between rehabbing and​ property speculation.
Let me explain .​
According to​ Dictionary.com, the​ definition of​ speculation where business is​ concerned is:
Engagement in​ risky business transactions on the​ _chance_ of​ quick or​ considerable profit.
a​ commercial or​ financial transaction involving speculation.
While all investing...in anything.. .​
has some element of​ risk to​ it, I​ want to​ highlight a​ key difference between speculation and​ investment .​
When you speculate, risk is​ higher and​ by the​ nature of​ the​ word speculation, more risk than usual is​ implied .​
So, in​ that context speculation doesn't fit what I​ advocate at​ all .​
I'll explain further, but first let me illustrate the​ difference between investment and​ speculation in​ real estate rehabber terms from something that happened to​ me just this week.
I got a​ call; a​ hot lead from my wholesaler .​
The property was located on the​ fringes of​ a​ hot area of​ my town called Riverside .​
Riverside is​ an​ area where historic homes are being bought at​ inflated prices and​ fixed up very nicely! Put simply, properties in​ Riverside at​ in​ demand .​
Well, that's in​ the​ heart of​ Riverside, but this house was on the​ distant edge of​ that part of​ town .​
The house was 934 square feet .​
Great area, yadda yadda .​
My wholesaler needs $81,900 and​ he was the​ house's repaired value will come in​ at​ around $120,000 .​
He continually repeated something he heard from an​ appraiser about values around Riverside being a​ great investment over the​ coming years .​
I agreed to​ go and​ take a​ look .​
Before I​ did, I​ do some of​ my own checking .​
From the​ tax records available online, I​ learned that the​ house was built in​ 1942, just changed hands last year for​ $72,000 and​ was of​ wood construction with asbestos shingling on the​ outside .​
It didn't look good when I​ looked at​ the​ numbers .​
IF...and in​ my mind a​ big if...the appraisal came back at​ $120,000, then the​ 70% I​ can get a​ hard-money mortgage for​ is​ $84,000 .​
So, my mortgage would only cover a​ portion of​ my closing costs, but none of​ the​ rehab .​
In addition, a​ few months ago, I​ bought a​ property a​ few blocks away for​ $38,000 .​
I'm just not seeing the​ value in​ this property BEFORE I​ look at​ it .​
When I​ looked at​ the​ property, it​ had some things going for​ it .​
It looked to​ be in​ pretty good shape and​ was on a​ corner lot .​
In truth, it​ needed $10-12K rehab .​
One negative is​ that it​ was square and​ there is​ no porch under the​ roofline to​ easily add square footage for​ increased value .​
The neighborhood is​ fair but two things jumped out at​ me:
- There is​ a​ couple of​ very old apartment buildings on the​ street .​
Normally this would not bother me in​ the​ least, but these will prevent the​ yuppie crowd from rushing into the​ area in​ a​ buying frenzy.
- Every other house within sight was also very small and​ of​ simlar construction .​
This means the​ houses on this street are not the​ architectural gems in​ the​ historic and​ sought-after areas of​ Riverside .​
If the​ money situation would have been better, that is​ to​ say, if​ this was a​ better investment, I​ would buy, Buy BUY! if​ the​ spread allowed me to​ buy and​ rehab it​ with little or​ none of​ my own money, I​ would have .​
But, if​ I​ bought this house and​ rehabbed it​ with considerable out-of-pocket investment, I​ would be speculating on the​ area, and​ I​ had my doubts .​
Of course I​ didn't buy it, but if​ I​ had, that would be speculating!
So, how would I​ define speculating?
- Speculating involves taking on more than usual risk.
- Speculating involve banking on values that aren't there today, and​ aren't projected to​ be there based on NORMAL conservative appreciation rates.
- Speculating is​ banking on external or​ environmental factors to​ make you money .​
***External and​ Environmental Factors (that pertain to​ property) are factors that are not part of​ the​ property itself such as​ neighborhood, infrastucture, city, the​ paper mill down the​ road, rental demand, etc .​
***
What is​ investing, but not speculating?
- Buying property that you are safe in, meaning you could rehab it​ and​ sell it​ in​ the​ short term and​ make money .​
- Buying property that will make you money based on what you bought it​ for, current environmental factors, and​ conservative appreciation rates.
- Buying property such that hope is​ not part of​ the​ strategy!
One of​ the​ key factors in​ STAYING a​ successful real estate investor is​ strict adherence to​ your investment strategy and​ criteria which are tied closely to​ your investment goals .​

A good real estate investor does what works over and​ over again and​ does not take on more and​ more risk as​ they go .​
Smart investors only ventures into other, uncharted investment areas (e.g., single family homes to​ commercial property) after careful investigation .​

I think I​ can safely speculate that the​ most successful real estate investors incrementally decrease their risk as​ they gain experience .​
Not the​ other way around.




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