Are you a Real Estate Speculator or Investor?

For about the past 20 years or so, it didn’t matter much what real estate you bought if you paid a reasonable price. With interest rates dropping and more people looking than were selling, you could buy something in January and sell it in March with a hefty profit.

Perhaps you were one of those folks that got into the flipping game. You bought a house that needed work, painted and fixed a kitchen and made $100,000 when you sold it a few months after the purchase. Simple to repeat, but why not buy a bigger house to make more profits? So, with interest rates at 2%, you took out more loans and bought more enormous flipper houses. You made $200,000 and had multiple offers on your properties each time. So, you continued with this great new business until the music stopped. Now, sitting on a 1.2-million-dollar flip that no one wants to buy, you are paying 8% interest on the variable mortgage that seemed so bright just a year ago.

But you never were a Real Estate Investor, always a Speculator. You weren’t buying anything to hold over 10 or 20 years. You were in for the quick adrenaline rush of a quick buy and sale. It was fed by that same feeling people get when they put all their money on red at the roulette wheel and keep winning in Vegas. It’s pure speculation because actual Investing is boring. 

Investing means you buy a property at a price considerably less than what you have calculated to be the value. Once purchased, you hold the property or land for a very long period while it kicks off cash and slowly increases in value. In some cases, that could mean staying with the property for 25 years or more. The 25-year win is one of my favourites. 

Here’s an example: I want you to be honest with yourself. If you could see yourself doing this, then there is a chance you could become a great real estate investor, not a speculator.

You buy a rental property for $350,000. It’s a duplex, and the tenants pay all the expenses, including your mortgage, and you have $350 left over at the end of the month. That $4,200 per year you put into upgrades of the property or invest in dividend paying stocks. Your house is paid off at the end of the 25-year mortgage period. The value of your house in 25 years is $395,000. Would you make that investment?

I would, and here’s why. Over the 25 years, you would have received some 105,000 dollars in cash flow, more than making up for your down payment of $70,000 when you bought. The house is now paid off, so you can harvest that $350,000 tax-free by selling it because that is what you paid for it. You may also refinance the house, collect those funds tax-free and buy your next investment for 25 years. Wash and repeat that, and you are a true real estate investor.

Today, most speculators are facing what was always going to happen. Eventually, the roulette wheel will land on green, which means you will be wiped out, as will other speculators betting. Benjamin Graham, in his book The Intelligent Investor, explains it well. Pick up a copy today and get reading. That’s if you aren’t hurrying to spend money on the roulette wheel.

If you want more information or details on this topic, subscribe to my weekly podcast, where these ideas are fully explored.