Where Real Estate Investing and Speculation Collide

Some uninformed folks would describe someone who rehabs distressed property as a “speculator” or even a “property speculator.” Don’t be fooled! There is a VAST CHASM of difference between rehabbing and property speculation.

Let me explain. According to Dictionary.com, the definition of speculation where business is concerned is:

“Engagement in risky business transactions on the chance of quick or considerable profit.”

“A commercial or financial transaction involving speculation.”

While all investing…in anything… has some element of risk to it, I want to highlight a key difference between speculation and investment. When you speculate, risk is higher and by the nature of the word speculation, more risk than usual is implied.

So, how would I define speculating?

• Speculating involves taking on more than usual risk.
• Speculating involve banking on values that aren’t there today, and aren’t projected to be there based on NORMAL conservative appreciation rates.
• Speculating is banking on external or environmental factors to make you money.

**External and Environmental Factors (that pertain to property) are factors that are not part of the property itself such as neighborhood, infrastructure, city, the paper mill down the road, rental demand, etc. **

What is investing, but not speculating?

• Buying property that you are “safe” in, meaning you could rehab it and sell it in the short term and make money.
• Buying property that will make you money based on what you bought it for, current environmental factors, and conservative appreciation rates.
• Buying property such that hope is not part of the strategy!

One of the key factors in STAYING a successful real estate investor is strict adherence to your investment strategy and criteria which are tied closely to your investment goals.

good real estate investor does what works over and over again and does not take on more and more risk as they go. Smart investors only ventures into other, uncharted investment areas (e.g., single family homes to commercial property) after careful investigation.

I think I can safely speculate that the most successful real estate investors incrementally decrease their risk as they gain experience. Not the other way around.

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