Real Estate Speculation
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2006
Why try real estate speculation? Well, you can make a lot
of profit in a year or less if you have your timing right, especially
if you have your cash split into small down payments on many
properties. Of course it is easy to guess wrong when it comes
to future price appreciation, and this can mean you get eaten
alive by expenses on properties that don't go up in value fast
enough.
Speculating is a common method of "investing" when
times are good. It is also very risky. The idea is simply to
buy at a reasonable price and count on rising values to make
you some money within a few months or a year. Often people who
invest this way are losing money from month to month on their
investments, planning on the profit when they sell to easily
cover those losses.
When we moved to Tucson in 2004, prices of homes had been
going up by more than 20% annually for years. Homes that cost
$200,000 rented for as little as $650 per month. Even small apartment
buildings were so overpriced that actually getting cash flow
was just a dream.
Hundreds of investors were buying properties like these that
that made no financial sense. Upon purchasing them, they immediately
had to start shelling out hundreds of dollars per month to hold
onto them. Why did they do it? Because they could sell the home
for $50,000 more within a year or so.
By 2006 prices stopped going up. What do you do when you bought
a property that has a negative cash flow of hundreds of dollars
per month, and the value stops rising? Well, hopefully you find
a creative solution, but most often, you simply lose money. This
is a risky game.
Naturally, it is hard to convince those that made money this
way that it was a bad idea. The real question, then, is how do
you predict a fast rise in values? At the time we moved from
Tucson (2006), everyone in our real estate investing club, including
all the wealthiest and most experienced investors, were convinced
that prices would continue to rise, so this may not be an easy
task.
Stop looking at the trend, which after all, can change starting
next month, and is only a trend after it happens. More
important may be a look at the job creation in the area, which
drives the demand for housing and other real estate. A real estate
boom may pass a city by if there is no growth in jobs, and therefore
no growth in population.
Watch the direction of interest rates. As they fall, prices
can easily go up without houses actually becoming less affordable.
For example, when my parents sold their house in Michigan, it
was worth almost double what they had bought it for, but the
new buyer would make almost identical payments. This is because
my parents bought at a time when interest rates were over 13%,
and the new buyer was borrowing at 6%.
Of course the opposite is true as well. It is much less likely
that people can continue to pay higher prices if interest rates
are rising. This is certainly part of the reason why home prices
are dropping in many areas as I write this.
The bottom line? Do your homework before you count on rising
prices as an investment strategy - and even then remember that
real estate speculation is closer to gambling than investing.
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