Hi Desert Real Estate Forum

    You frequently hear the term “real estate investor” but you rarely hear anyone refer to themselves as a “real estate speculator”. While some say that the terms are synonymous, I beg to differ. Speculators and investors, while dealing with the same commodity, handle their portfolios in entirely different ways. Although both can be profitable in the right market, in my opinion investors tend to fare better in tough economic times allowing them to “fight” another day.

    Real estate speculators acquire real estate during an improving market hoping to “flip” or “turn” the property in a relatively short time for a profit. Many speculators acquire the property with little or no capital investment, utilizing loans with low carrying costs in order to minimize investment while waiting for expected appreciation in the property. Today, many of the financial tools used by speculators are gone or have been severely altered. Interest only or negative amortization loans based on stated income from the speculator are a thing of the past. 100% financing (usually in the form of a first and second trust deed) for the speculator are also gone. Many in the industry blame, at least in part, the speculator for the current housing crisis. As an example, the median price of a home in 29 Palms appreciated 77% in 2005. That means if you paid $100,000 for a home in January 2005 that you could sell if for approximately $177,000 in December of 2005. That would be a net profit of $77,000, less costs of sale and taxes, to the speculator for holding the property for a year. The country, and our desert, saw a lot of profit made by the speculator during this period. There were many wise people who began acquiring property in late 2003 through 2004 that were able to pull the trigger in 2005 and make a tidy profit. The problem is that many speculators were late to the game, acquiring property late in 2005 through 2006. We all know what has happened to the market since then. up to a 40% drop in value has left speculators with increasing mortgages and decreasing values. Since the speculator has very little equity in the property, and no ability lease the property for a profit the speculator has little choice but to let the property go.

    Enter the investor. The investor operates under a different paradigm. The investor acquires real estate for the long term. In fact, many of the properties currently being lost by speculators are being grabbed up by investors. Most investors participate in the financing of the property with a substantial down payment (generally 20-50%). In this case, renting the property is possible because the rents collected generally cover the investors carrying costs as well as putting a little money in the investors pocket monthly. When times get tough, as they are now, the investor has room to lower rents to maintain occupancy, or sell at a reduced cost due to the equity the investor maintains in the property. While the investor does not turn a quick profit, the investor does reap benefits from this method. First, the investor gains tax benefits from annual depreciation, maintenance and carrying costs. Secondly, under the right conditions the investor will realize a monthly profit from rents collected while having the carrying costs paid by the tenant. Finally, when the investor chooses to sell, especially in an up market, a substantial profit can be obtained. Under normal conditions values in California increase at a rate of approximately 10% per year, in the desert that number is closer to 4 or 5% annually resulting in a net profit for the investor. As with any investment there are risks involved; vandalism, squatters, vacancy, etc. These can be mitigated by maintaining a cushion from profits received and diligent management of the property.

    While speculators can make money an appreciating market, the investor can make money during all markets. In fact, many investors added speculation properties to their portfolios during the boom period. Even though the financial are real estate markets are currently distressed, many investors are coming back into the market preparing for the next boom market.