Types of Real Estate Ownership (Part 2: Speculative Real Estate)
Yesterday we took a look at the one type of real estate ownership: investment real estate. Today, as we continue looking at types of real estate ownership as set out on PowerWealth.com, speculative real estate is the subject.
Speculative real estate
Speculative real estate is when you purchase real estate at something close to the market value in the hopes that the value will go up. This is called speculation, because you speculate that the real estate will go up, and you aren’t planning on doing much with it, beyond just buying it. The problem with buying real estate and just holding on to it is that it does not always go up. Logan Flatt, CFA, explains:
What we do know at the time of purchase is that there are three equally likely outcomes for the future market price at which the new owner might ultimately sell his property. First, there is a 1 in 3 chance that he will sell the property at a future market price equal to the current market price. Second, there is a 1 in 3 chance that he will sell the property at a lower future market price. Finally, there is a 1 in 3 chance that he will sell the property at a higher future market price. In other words, at the time of purchase we know there is a 2 in 3 chance the new owner will fail to sell his property at a higher future market price.
Flatt also points out another thing that is worth mentioning. The fact that interest paid and other costs of buying property are part of the total cost can seriously cut into your profits. Speculative real estate means that you buy property and then sit on it, hoping it will go up in value. While this can work out in some cases, it is important to note that you are not getting any cash flow out of this arrangement, nor are you getting the satisfaction of living on the property, since you bought it to hold on to, rather than to live in. Monday: personal real estate.
Tags: real estate, types real estate ownership, real estate ownership, speculative real estate,
real estate investment, personal real estate
August 20th, 2007 at 10:32 am
[…] the final installment in a three-part look at types of real estate ownership. We’ve looked at speculative real estate, and we’ve looked at investment real estate. Today’s focus will be on personal real […]