The Wall Street Journal recently had an article. (May 26th, 2005 Wall Street Journal: ‘Housing Boom Transforms Cities’) The article is primarily about the housing boom rejuvenating Baltimore and cities like it. The article says that Baltimore is drawing hundreds of small property investors and speculators. It references an English professor from California who took the red-eye flight in want directly to an auction and bought three houses at auction sight unseen. Scary!
This WSJ article doesn’t further distinguish between real estate investors and real estate speculators, so I will.
Merriam-Wester dictionary defines invest as “to commit (money) in order to earn a financial return”. M-W defines speculation as “to assume a business risk in hope of gain; especially : to buy or sell in expectation of profiting from market fluctuations”. Note the key distinction; the basis for a speculators return is the hope of profit from market fluctuation.
What’s the stock market idiom? DON’T CONFUSE BRAINS WITH A BULL MARKET. A parallel is true for real estate investing, an appreciating market does not make you an astute real estate investor.
I’ve profited from appreciating markets and love them as much as the next guy. I think momentum investing is a sound investing strategy.
Here’s the difference:
A real estate speculator chases last year’s appreciation without regard for the fundamentals driving that appreciation. Maybe the speculator will get lucky and make some money, maybe not.
A real estate investor applies the knowledge of the fundamentals real estate investing.
Short term real estate investors (flippers, wholesalers, rehabbers & condo converters, etc.): calculate after repaired value, carrying costs, resale costs, etc. They understand the market, often street by street, they watch the ‘for sale’ inventory and ‘days on market’.
Long term real estate investors: calculate cap rates, cash on cash returns, debt service ratios, etc. They monitor vacancy rates, job growth, absorption, building permits and average rents.
So what are you going be? Investor or Speculator?
Patrick Leblanc is the president of Reflex Investors Inc. and has been investing in real estate since 1991. Patrick can be reached at http://www.Reflex-Investors.com
Reflex Investors Inc. is a Massachusetts-based real estate services company. Acquiring investment property in high value markets across the U.S. Reflex offers no hassle, no headaches, real estate investing opportunities.
