Ways To Lose Money In Real Estate #3 (Speculation)

Speculation on a real estate market or a location is an easy way to lose money in real estate.

See other videos in the series here.

 

[Video Transcript]

Hey, Y’all. Zach McDonald, your real estate agent with Real Property Associates. And today we’re continuing the series, “Ways to Lose Money in Real Estate.” And episode three, we’re going to talk about speculation and speculating specifically on a market or location.

Speculation is risky, by nature, and one of the ways that you can lose money in real estate if you … Well, let’s just take a place like Seattle, for example. A place that has good job growth, has had a track record here recently of success. You’ve seen the local economy is really strong, we’ve seen the rental market be strong. There’s a lot of good things when you look at the Seattle real estate market in general, there’s a lot of good things and a lot of positive signs.

Now, if you were to go … Let’s just take Detroit for example. I’m not big into Detroit real estate, so excuse me if this example is incorrect at this point, but I do know that Detroit suffered massively in the last downturn and hasn’t recovered fully, and there are lots of factors with that. And if you are thinking, and I had a client talk with me about this a little while ago, and he was saying, “Hey, maybe we go up and buy these houses for $15,000 and maybe they go up in value again.” It’s possible that they go up in value. But there would be some speculation to it.

I guess the danger with speculation is you can, even with Seattle, right? Let’s come back to Seattle. You could say, “Well it’s been so great, let’s just buy a property that has maybe negative cash flow.” If you’re buying a rental and somebody else is covering your mortgage and they’re paying off your house over time, it’s more of a safe bet in the long term. But let’s just say, you’re looking at Seattle and you’re saying, “Seattle has a really good real estate market, it’s been really great, there’s a lot of good factors, and we’re gonna buy a house here at the top of the market, potentially. Or close to it. And then we’re going to rent it out for three or four hundred dollars less than what we’re paying every month on it.” So you’re spending money on it every month, and then really your big play there is appreciation because you’re losing money every month to keep this house.

And if for some reason the market doesn’t appreciate in your timeline, or maybe prices in Seattle never go up again. I don’t actually think that’s the case, but if it did turn out that way, you would essentially be spending money every month to have this house and now you have an asset that hasn’t really appreciated and we were just talking about the time horizon, and we were talking about if you sell too soon you lose money, because you have all these expenses on the sales side. It’s not gonna end up being a winning investment for you, necessarily. So just be cautious with your projections and be conservative with your projections. If you’re thinking like, “Seattle’s gonna appreciate 10 to 15% a year for the next 20 years,” in order for your projections to really pencil out, and that’s what you’re expecting, I would really caution you. It would make sense to have a conservative projection, and speculation. It would make sense to have a conservative estimate of what growth would look like in the area.

But to think that 10 to 12% would be longterm sustainable, would be a sustainable longterm growth, I would say not. So just be cautious with speculating, and make sure that you double check your numbers and be realistic with your projections.