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