What’s the difference between speculation and investing?
During our last real estate boom, there was a lot of speculation going on. A speculator is someone who’s counting on appreciation for their investment. An investor, on the other hand, is someone who’s looking for a long-term return on their investment.
At the moment in our market, we’re seeing a lot of larger investors with deeper pockets. On the speculation side, we’re seeing groups of people with large amounts of cash who are able to do their speculating quickly as a group.
If you’re going to be a speculator or an investor, it’s important that you know which one you’re doing. More often than not, I see investors looking at the return on their investment, but they’re looking at it based on their net profit after expenses and what their cash investment in the property was.
That’s not the way you should look at your return. Because you’ve had appreciation during that time, that equity in that property is part of your cash investment. If you cashed it out, it can go to the bank just like the money you put into the investment. When you’re looking at your rate of your return, you should look at the overall equity you have in the property and ask yourself if that property is the best place for your money.
If you’re going to gamble on continuing appreciation, you’ll land more on the speculator side. Neither role is better than the other—which one you choose usually depends on your age and your risk tolerance. At the end of the day, there’s more risk with speculation than there is with investing.
If you have any more questions about this topic or you’re thinking of buying or selling a home, don’t hesitate to reach out to me. I’d be glad to help you.