My property is guaranteed to go up in value – wanna bet?
What is speculation and how to avoid it when investing in real estate
Speculation is one of the riskiest forms of real estate investing. Speculation occurs when an investor makes a financial decision based on hypotheticals and guesses, not facts.
A great example of this is when I rented a condo in downtown Vancouver. I paid $1500 per month which was a steal of a deal. I knew instantly that the landlord was losing money each month (negative cash flow). I was able to determine that her costs were approximately $2100 per month resulting in a $600 a month cash deficit. Surprisingly, this was a common trend among condo investors in Vancouver.
One might wonder why an investor would purchase a property knowing there is a cash flow loss. Well, this is where speculation comes into play. In Vancouver, property prices have the ability to increase substantially and very quickly. The opposite is also true. What investors do is base their decisions on the likelihood their properties will increase enough to cover their cash flow losses and still pocket a quick profit. But if the market goes south, so does their net worth!
Investing based on speculation is extremely risky and not recommend for rookie investors. Knowledge of markets and stable trends must be analyzed before making any investment purchases.
If you ever have any questions about speculating and investing, any at all, please don’t be shy. Give me a call or send me a text or email. I am always willing to chat real estate over a cold beer or strong coffee.