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Real Estate Speculation

Profitable Real Estate Speculating

 

Real Estate Is slow to react to macroeconomic trends. Real estate is a regional market first, a national market second, and finally an international market. Those most likely to make costly mistakes are real estate speculators entering unfamiliar markets with insuficient study.

While stocks and commodities may occasionally change their character overnight as the herd dashes about, real estate as a whole is characterized by individual choices that take time to develop. For momentum to attract those outside the local arena, almost everyone within the arena will already be fully involved. This is the prescription for buying high and selling low.

Yes, real estate can go down in price.

No, there is little downside protection in professionally managed funds or REITs, real estate asset managers are as prone to the herd instinct as others, and they add another layer of expense and increase delays for needed action.

Profitable real estate speculation requires balancing several simultaneous viewpoints.

Local Markets - how excited are the locals about the prospects for real estate investment. If everyone knows it is a sure thing, it is probably time to sell - not buy.

International Relations - is conflict, physical or economic, a serious possibility? Money invested in real estate is captive to laws regarding property rights. How likely is there to be a change in the next decade?

Macroeconomic Trends - It is nice to sell to greater fools, it hurts badly to discover you were the last fool in line. If a trend has been in force for a very long time it may be approaching a reversal period. Don't try to capture that last 10% move.

Of course there are more issues than these few, that is where your own ideas have added value.

In most cases do not involve your home in your real estate speculations. If you are familiar with fractional implementation of the Kelly criterion for money management you may be able to avoid disaster - but don't bet on it. It is far better to be too careful and take a bit longer then having to start over.

How to invest is the big question. In much of the western world the real estate investment cycle is tied to a lender's pain cycle. Just as people in general move as a herd, so do lenders, only more so. "Lenders are herding creatures. They tend to think the same thoughts at the same time." - James Grant

Mark Twain said that was the difference between cats and men. If either touches a hot stove, they will move away quickly. The difference is that cats will never touch a stove again, even a cold one. Lenders have a lot in common with cats.

If you plan to invest in strip malls, take a look around first. If existing malls are full, and new ones are being built, it will be easy to get a loan to build or buy your own. Lenders will be fighting each other to offer better terms - after all strip malls are a safe investment. Once the easy money has been spent and the banks start getting back recent projects they will tighten lending procedures. As more projects return to the lenders, they will quit offering loans for strip malls, probably for years. Eventually a few projects will be built, they will make money, and lenders will start entering the field once more.

This same cycle will play out at different times in commercial property, multi-residential housing, hotels, and all other real estate speculation classes. If you have a general interest, see which asset class is not being funded right now. Approach a few lenders and offer to take some troubled properties off their hands, they will frequently offer great terms to return a property to a performing loan status. Contact banks through their REO or OREO department, Other Real Estate Owned.

(lenders you can contact me, investments at speculationrules dot com, if you want to quickly unload some non perfoming assets.)

If you have a particular interest, wait until the cycle comes around to where you have the advantage. If you picked up some strip malls when banks didn't want them, you will have years to fix them up for that time when the banks are competing to offer enticing terms. That will be your time to sell.

International real estate is another problem, perhaps we will address that in a later essay. For now there are enough real estate speculation ideas here to ignite your thought processes.

 

 

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