Sunday, June 17, 2007

Flipping Vs Speculating

I read a post from the Carnival of Real Estate Investing asking is Flipping Speculating?

Dough Roller makes a couple of good points that I agree with
  • people that flip based on assumed rising prices are speculators, whether they do it by Day Trading Stocks or ala Casey Serin
  • Speculators are looking for quick easy profits

He makes another point that I don't agree with in regards to leverage. If you use leverage you are speculating. I think most businesses use leverage to a large degree, so I don't think that this is true. Of course, I use leverage to a great degree as do most real estate investors. This is the norm in real estate - not many pay cash for an apartment or house as they would to buy stocks.

One of the commenter's (engineer) makes an excellent point about investing but fails to recognize how it applies to real estate. His comment is that investing involves buying equipment to improve the ability to produce. When an investor buys a house and rehabs it, he is doing exactly that. For example, putting on a new roof, new windows, a new furnace, painting and decorating all improve the income potential from that piece of property. So Engineer makes the point exactly that an person that buys a house and rehabs it is a true investor and not a speculator.

So the real question comes down to the time frame the property is held. If I hold the house for 20 years am I a real investor Vs selling the house in 6 months or a year? Rehabbing is by no means "easy profits" (we put in a helluva lot of work to rehab our Cheektowaga house). What about the house that I lease-optioned for a year? Was that an investment or speculation?

My definition of an investor is:

  • Purchasing an undervalued asset and improving it so that it can generate more income

By my definition, people that buy stocks or mutual funds are not investors at all!!

I think that Dough Roller nailed what a speculator is.


Dough Roller said...

Nice post. I should say that I, too, use leverage in my real estate investments (although never in my stock market investments), and sometimes even borrow 100% of the cost of the property (which usually equals about 80% of appraised value). I agree with you that leverage does not equal speculating. But do you agree that speculating almost always involves a highly leveraged deal (at least in real estate)?

Best, DR

Paul said...

I think that speculating can involve high leverage, but not always. My brother bought a sand dune on the coast of NC for cash out of his IRA - no leverage involved. The next hurricane could have washed his "land" away. Some greater fool bought the sand dune for 10x what he paid and the next storm wiped it out. Both my brother and the second fool were speculators in my opinion.