All investments are speculations. What are you speculating on?

I used to tell people that I don’t like to speculate when it comes to investing in real estate. I like to invest for debt pay down and cashflow. If the property increases in value while I own it, that’s a bonus, but my investments are not dependant on appreciation to be profitable. I feel like banking on appreciation is a bit of a gamble, especially if the property doesn’t cashflow and you require appreciation in order to generate a profit. However, the recent changes in the economy have made me realize that all investing is a speculation in something.

Investing in a particular stock or a companies stock, is a speculation that other people will invest in that stock or company and that the company will be prosperous in the future. Investing in the stock market in general is a speculation about the economy and peoples comfort level with having their money invested. Obviously when the economy is doing well, people invest and companies prosper and when people are fearful of a downswing in the economy and poor company performance, money is pulled from the stock market and stocks decrease.

You can also invest in gold, antiques, art, classic cars and other collectables. Those are simply a speculation on the supply and demand/desirability for those particular items in the future.

You can invest in a company, or use your capital to start your own. This is simply speculating that the company will be profitable in its endeavours or that the company will be sellable for a profit at a later point.

There are many ways to invest in real estate. Some are viewed as more speculative that others. Buying a large piece of raw land with the hopes that it might be sub dividable or developable in the future is a speculation on exactly that. Buying commercial property is a speculation that there will be a demand for retail space in that area. Doing a flip is a speculation that the property you are flipping will be worth more when you are done with it than what you paid for it, plus any rehab and buying/selling/holding costs.

I always thought that buying a rental property that produced enough income to cover all of the properties expenses and still generate some cashflow wasn’t really speculating. After all, if you buy a house for $250,000 and put $50,000 down and pay off the $200,000 mortgage over 30 years, even if that house is only worth $100,000 30 years later, you still made $50,000 in debt pay down (and hopefully some cashflow). There was no need for the property to increase in value in order to make money, so there was no speculation on the value of the property, but there was still speculation. Speculation that the property would be rented.

When I started hearing from investors that were dealing with many of their Airbnb rental units sitting empty due to reductions in travel, I realized that their speculation wasn’t dependant on appreciation, but it was a speculation on people using Airbnb. When travel shuts down, so do Airbnbs. Many Airbnb properties can’t cashflow as long term, month to month rentals, and the speculation that all of the properties expenses could be covered by the increased income produced by running the property as an Airbnb was dependant on their being a large demand for short term vacation rentals. No one could have predicted the Covid-19 crisis, but Airbnb is a speculation in travel and travel can also be effected drastically by the economy, so any recession, whether cause by a pandemic or a financial meltdown like 2008, always has the potential to cripple investments that speculate on travel.

This made me step back and ask myself, what is a long term, monthly rental property speculating on? Simple. People living in buildings. People always need a place to live. Can that be effected by various things? Absolutely. It is after all still a speculation. A decrease in the population in the area where the property is located could put a long term rental property in the same circumstances that Airbnb properties are in during times when people are traveling less.

I believe that real estate is one of the safest and most profitable investments, but any investment is a speculation on something. Different ways of investing in real estate are speculations in different things. There is no right or wrong answer as to what is the best thing to speculate on, just make sure you are aware what your properties are a dependant on and what could effect those things. Government policies, local and international economics, changes in technology, changes in local demographics, travel and transportation and even a virus can drastically effect different parts of the economy. What are your investments dependant on? What are you speculating will staying the same? What are you speculating will changing in the future?

Investing is speculating. There will always be some risk associated with speculation, but understanding what exactly your investments are speculating on can help you reduce your exposure to risk.

There are great niches in real estate that people use to generate great returns, but for me the biggest advantage of long term rental housing is it falls into the three basic needs of humans. Food, water and shelter. Speculating that people will need all of those three in the coming years is a very safe bet.