Real Estate Investment VS Speculation

Portrait Andrew Schulhof

#303-1338 West Broadway
Vancouver
British Columbia
V6H 1H2

What does it mean to be an investor as opposed to being a speculator of real estate? The differences are substantial but many speculators masquerade as investors or even first time buyers.

There is the old saying “May You Live In Interesting Times”, and this is certainly what we all have been experiencing for the last 15 months and counting. Interestingly, real estate has been in the news almost as much as the pandemic. The Canadian real estate market has gone in the complete opposite direction to the 50-71% decline forecasted this time last year by the head of CMHC (Canadian Mortgage and Housing Corporation).

Unprecedented Sales & Speculation

Many of the major markets like Vancouver, Toronto, & Montreal have seen incredible, if not unprecedented, – sales activity. Many Canadian cities have had some of their highest sales numbers and sales to listing ratios for a very long time. The over-asking, no subjects, multiple offer situation is not just unique to Vancouver, Toronto and Montreal. In fact, I have also witnessed this in Victoria, Nanaimo, Prince George, and Calgary. Even the Moncton, New Brunswick, housing market has come alive with activity not seen for decades. This brings me to the real point of real estate investing vs. speculating in these turbulent times.

What is the Real Difference between Investing and Speculating?

I researched the actual differences between investing and speculating. Here is what Investopedia has to say: “An investment is typically a long-term commitment, where the payoff from putting that money to work can take several years. Investments are typically made only after due-diligence and analysis has been undertaken to understand the risks and benefits that could unfold. Speculation, on the other hand, is a pure directional bet on the price of something, and often for the short-term.”

 “The primary difference between investing and speculating is the amount of risk undertaken. … High-risk speculation is typically akin to gambling, whereas lower-risk investing uses a basis of fundamentals and analysis.”

If you’ve done a thorough evaluation and you’re reasonably sure your principal is safe—and you have a chance to make a profit—you are investing.

If you are “investing” in an asset that has uncertain protection of principal—and you have a chance to make a profit—you are speculating. For a more in-depth look at this, check out Chapter 3 of my new book Look Before You Leap, But Leap!

Basis Of ComparisonInvestmentSpeculation
Time HorizonLong TermShort-term generally less than a year
Risk LevelsModerateHigh
Deployment of fundsAn investor using funds of selfBorrowed funds
Investor attitudeCautious and ConservativeAggressive with an element of carelessness
Decision criteriaFundamental and Basic factors,Market psychology, individual opinion
Expectations of ReturnsModest but continuousA high rate of return.

Are Low Interest Rates, FOMO & Cabin Fever causing “Crazy” Housing Activity?

The reason I wanted to write about this is because I have seen a great deal of abnormal (some call it “crazy”) housing activity currently in Greater Vancouver. This is a result of the combination of FOMO, pent up demand and low inventory, super low interest rates, updated mortgage stress test rules for June 1st, 2021, and enlarged savings accounts as people have not been going out to dinner, doing activities like going to movies, bars, concerts, plays, sporting events and travelling. Combine these with a bit of “cabin fever” especially for those with smaller spaces – and now you have what is speculating in the real estate market because it has been a seller’s market. In many ways, I believe that many of the purchasers are speculating even though it is their home and not an investment per se. The reason I believe this is because the low level of due diligence being done prior to even purchasing the home.

Emotional Buying = Overpriced and Subject-Free

Unfortunately, some homeowners are going to find themselves overleveraged on overpriced properties that may have latent problems to which they are going to discover later and will not be able to do anything about it. This is because they went in subject free and at a value that very well may be overpriced if the market takes a downturn and in fact they could be under water financially if the values drop below the mortgage value. I have seen people do more research on a TV than a home in the $1 Million plus range.  Why? I chalk it up to emotions and the belief that the market will only go up

What about Investment Property Sales? Speculation abounds!

I have also witnessed this same speculative phenomenon with real estate “investors”. I personally know an investor that purchased too many presales in one building and thought that he was going to be able to assign or sell the condo units at a premium prior to closing. He was wrong and in fact he runs the risk of losing his combined deposits of well over $100,000. This investing style was purely based upon speculation as his only exit strategy was to get out at a profit before he had to close. It didn’t work! Another example is the recent LNG investment divestment by Chevron and Woodbridge in Kitimat. It wasn’t that long ago that Kitimat was “THE BC Town” in which to invest (speculate). There has been so much development (too much development in my opinion) based upon sustainable economic and job modelling, even if the LNG pipeline and port does get built there. It just got real there and it will not be pretty!

Speculation is fine as long as you know that is what you are doing and that you are prepared to accept the risk which is always higher than straight forward investing. People have made massive wins speculating and that is great, but there are a greater number of people that have lost massively due to the speculative approach to investing.

Here is the scary part, cracks in many of these overheated market conditions are already showing up. Here is a recent headline illustrating that point: Canadian Real Estate Is Seeing Home Buyers Fall Faster Than Sellers

Get Back to the Basics

So what can you do? Even if you are speculating, get back to the basics. Understand the market in which you are speculating. How is the specific market trending for inventory, jobs, population, demand and absorption for the housing type on which you are focused? Build in at least 2 to 3 exit strategies. Are you nearing the peak or past it? Take the time to identify real potential risks. Is the market being over built? What would it look like when the shine comes off the market?

Real Estate Investing Basics

Real Estate Investing usually entails a great deal more upfront due diligence and multiple faceted approach. It takes you back to the basics. As an investor, in order to be a successful investor you want to improve your odds. This is done by conducting the required research so that you are making informed decisions. Then you need act upon your decisions. It pays to understand the fundamentals of real estate investing.

Strategies & Exits

One of the key steps is to decide what investment strategy or combination of strategies you are taking, some investors do fix and flips, assignments, buy presales, some buy for cash flow, others buy for long term and appreciation. All of these formats are viable strategies depending on the investor’s skills, knowledge, risk tolerances, and resources. In your investing strategies you need to invest with the exit in mind. To reduce your risk, it is best to determine what potential exit strategies are available and it needs to be more than one.

Market Selection

There are many indicators that can provide you clues to how the real estate market is doing and where it may be trending. It is worth investigating these indicators, such as GDP, job growth, population growth, housing starts and inventory, sales, listings, rental and vacancy rates, etc. One of the key things is to understand the real estate cycle of the target market.  In Chapter 20 of Look Before you Leap, But Leap, you can explore the fundamentals of understanding real estate cycles. Is the market contracting, bottoming, recovering, rising, or peaking. For example, is Vancouver, Chilliwack, Toronto, or Prince George going to work for your particular strategy, or could Winnipeg or Kamloops, or Edmonton work better?

Effective Timing

Within the discussion of real estate cycles, understanding market position timing is an even more important aspect to know first, even before location. For example, you could invest in the best location, but at the wrong part of the market real estate cycle and fare poorly in terms of return. This is not to say that location is unimportant. In fact, investing in a good location is critically important and beneficial when combining it with understanding the market position timing. That way you can potential gain value appreciation over a more effective timeframe. If you are flipping and you understand that you are in a rising market, you can do well, but as the market peaks, flipping can become problematic.

What is critical in Asset Selection?

Selecting the correct property for your investing strategy is absolutely critical to your investing success. This begins with conducting your due diligence on the property in advance of the purchase. Look at what properties are doing well for the strategy you are employing, and then duplicate. As an example, you don’t want to over renovate for the market conditions whether the property is being purchase for resale or for renting. There is a saying that “buying the ugliest house on the block is a great place to invest”. This is because you can renovate up to the level that is indicative of the other homes in the neighbourhood and generate a good return when you buy, refinance, rent out, or sell correctly. This concept can also apply to condominiums, apartment blocks, and other property types.

Conclusion: Investor or Speculator?

In the real estate world, just like in the stock market, those individuals who take action without proper due diligence run a large risk of losses and are most likely are speculating. You need to decide if you are going to be a real estate speculator or an investor.

Reach out to me if you want to learn more about real estate investing or are looking to invest, buy or sell.

Get in Touch

If your are interested in investing in real estate, or looking to list your current home, I can help you form the appropriate strategy and answer any questions you may have. 

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