A while ago I wrote an entry here on active rain and on my real estate investing blog about the difference between a real estate investor and a real estate speculator. My view is that either approach may be right for you, but the danger comes when you think you're doing one and you're actually doing the other.
Some of the comments I got prompted me two write a few lines in defense of the real estate speculator. Great investors from Warren Buffett to T. Boone Pickens have always focused on fundamentals, but they've also shown a willingness to take a view on the future. In my view, that's ok.
Here are a few things I keep in the back of my mind:
- Buy what you know: Raise your hand if during the .dot com boom you bought stock in a company that you weren't quite sure exactly what they did. If you sold all your shares of webvan and pets.com at the pre-cash peak then you walked away with some fat capital gains...but if you're like most of us then you rode it up then rode it all the way down. If you're going to take a view on something make sure it's a market that you know intimately. I recently made such a purchase - a foreplex in a hot area w/ marginal economics - but which will turn out great for me if the city puts in a proposed light rail line that will pass within a few blocks.
- Flippers are speculators: Flippers are made by rising markets and broken by falling ones. This is a bet on a factor that is outside of your control as an investor.
- Buying in an overheated market? You're a speculator. If you're buying in a region where $400k buys you a starter home that rents out for $2,500 per month then the only thing that will allow you to get a decent return on your money is rocketing price appreciation. If you catch the market right then you'll be in great shape, but almost all purchases in these regions are purely speculative.
Read more about taking a speculative view...
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