Real Estate Investment versus Real Estate Speculation

Many people view getting a residential real estate that’s occupied by the owner as a smart and worthwhile type of investment. Realtors typically use this as part of their sales pitch. However, this is a fallacious point of view and it’s one of the beliefs that cause the asset price bubble that burst back in 2008. Houses aren’t a great investment in many circumstances mostly because of the difference between speculation and investment.  To be more specific, when you invest on something, you do so with then expectations that you’ll get consistent and predictable cash flow out of it. Realty and home-owned real estate doesn’t work by those investment rules. This is more applicable to rental properties and bonds as well as savings account cash.

What Is The Difference?

* So what’s the difference between real estate investment and real estate speculation? Rental properties are considered good investments as long as there’s a monthly rental income that exceeds the cost of ownership.Otherwise, it becomes a financial sinkhole of sorts. Since the real estate bubble inflation, economic crisis, and slow economic recovery, few houses have been available for low prices. What’s more, since 1890, houses have appreciated in value at 0.7%.

* Meanwhile, speculation involves purchasing an asset to sell at a later date with the understanding that the property you bought (usually from repo sales or foreclosed properties) at a cheap price will have a much higher value in the future. You can speculate by selling something at first then buying later, which is also known as selling short (also related to the turn of phrase). Speculation realty is how Donald Trump made his billions, actually.

* Speculative assets are not valued through the basis of cash flow. It’s instead based from perceived chances of selling it later for potential profit. Properties can be bought at the right price as an investment, but most people are actually engaging with speculation based on the belief that their land can be sold for a profit at a later date compared to what they invested on it. It’s a fallacy to believe that any property held for a long time can result in profit when sold.