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What You Should Know About Real Estate Speculation


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Real estate speculation is the purchase of a real estate asset (building or land) with the hope that it will become more valuable in the future. It is a passive approach to making profit based on forecasts and educated guesses of future real estate market trends not substantiated by firm evidence. Speculation leaves no room for the speculator to influence the profit outcome, because there is not much you can do as a speculator to drive, influence or accelerate the appreciation of the land or building(s). Real estate speculation can be likened to investments in stocks or sports betting in this respect.
On one hand, real estate investments generally involve a degree of speculation on the potential for appreciation in the value with time due to changing market conditions (demand versus supply) and/or improvements in face value (infrastructural, social, economic, security) in the locality. On the other hand, it is important to note that house flipping is not real estate speculation. People who build houses for rent, purchase homes or buildings at cheap undervalued or below market prices then upgrade or renovate such buildings to sell at a profit are investors, not speculators. Likewise, people who purchase large areas of bare land and then construct road, drainage, perimeter fencing and provide electrification before selling plots to individuals interested in building homes or retail spaces are real estate investors, not speculators.



 Risks of real estate speculation
·       Money tied up in medium to long term real estate speculation might not generate income during the length of time one needs to wait for its value to increase enough to sell it. Often, people will have these properties sit idle for years before it can be sold for a profit that beats inflation. A real estate investment in rental properties however will continually generate rental income while a house flipping investment will generally be concluded and sold for profit much quicker than in the case of real estate speculation.

·       In the case where real estate speculation is done with borrowed money, the cost of borrowing (interest), in addition to other expenses such as taxes, will require the speculator to have the means to manage these cost comfortably during the wait time for the real estate property to increase in value.
              
·       Getting a loan for real estate speculation is almost impossible because banks generally only want to finance investments with good revenue streams. The lack of a good revenue stream during the wait time involved in real estate speculation will impact how much the bank is willing to lend out to the speculator. This is because the speculator will still have to show a reasonable capability to pay back the money in a timely manner. Banks don’t like to hear that they will have to wait (and hope!) for the real estate speculator’s investment to appreciate after several years before being paid.  The risk model of banks depends on an orderly repayment schedule being maintained, not on hope.

·       The opportunity cost of tied-down capital involved in real estate speculation should also be considered since that money could have been invested in something else (a business venture, real estate rental portfolio, house flipping) with better input from the investor to boost the chances of making a profit. Other passive investments like bonds, treasury bills, mutual funds and precious metals can in many cases deliver better overall yield than real estate speculation.

·       The savvy speculator needs to be knowledgeable of the trends in a particular real estate market, and not rely on guessing. The most dangerous aspect of real estate speculation is that Real estate markets are always changing, and the risk comes from inability to correctly predict and react to the changing market trends. There is a big element of luck and chance involved.

When real estate speculation is successful
The potential profits from real estate speculation can be quite impressive, and if one can reduce the risks involved enough while having a good plan that is expected to work well or has worked several times already, then real estate speculation can be a great way to make money without overly exposing oneself. Many share experiences of buying cheap land acreage which turned out to become expensive prime real estate with the passage of time (years, sometimes decades).  Successful real estate speculators know that things often don’t go quite well as one may initially hope, but if there is spare money to invest for that long, enough caution is used and one is prepared and skilled enough, speculating in real estate can be a profitable venture. There are people who do well at this, but it isn’t as simple or as easy as a lot of newer speculators think, especially those who have had their expectations hyped up by narrated experience of others who may have made huge profits and want you to think that it can be this easy for everyone.

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 Real Estate as a Store of Value
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