In our area of interest as a real estate investment company, we’ve noticed that many people confuse the terms “real estate investor” and “real estate speculator.” Both refer to those who invest in real estate in some capacity — but they vary in their motivations and strategy for real estate investment. Some of the key differences between the two include:
- The time invested
- The risk and reward expectations
- The decision-making process
- The emotional factors
We’re not here to say that one is better than the other, but rather that understanding the differences may help you decide which path is best for you on your real estate investment journey.
1. Time Investment
The difference in the time invested between a real estate investor and a real estate speculator can be summed up in two words: long and short. The investor is in it for the long haul and is not looking to make a quick turnaround. They understand that their profit is based more on averages than a quick upswing in the market. Speculators, on the other hand, are looking for short-term investments and want to see a high yield in that
2. Risk for Reward
Another key difference between an investor and a speculator is in the risk they are willing to take for the reward they expect. The investor is looking for a steady return for, at most, a moderate risk. Generally, the investor is looking to play it safe. On the other hand, the speculator is looking for a high yield and is willing to take a high risk to make that happen. They are more of a gambler than the investor is.
Decision-making can also help define the two. The real estate investor tends to base decisions on clear, defined parameters. They know the market and understand the underlying factors that drive it. They also base their decision on the current conditions, rather than a hypothetical future scenario. However, speculators tend to base their decisions more on tips and following trends. They often speculate or guess that something is going to happen that will pay off big. Sometimes this does pay off, and they reap the rewards.
4. The Emotional Factors
Emotions also play a bigger role in the process for the real estate speculator than they do for the investor. The speculator tends to go after the excitement of the next big thing. It is just like gambling; it might be calculated, but it is still a gamble. The residential real estate investor, however, is going to base the decision on logic. There’s not major excitement, just a slow, steady pace that results on a solid return on investment.
So why is it important to understand the difference between a real estate investor and a real estate speculator? First, you must consider the risk factors and whether they are acceptable to you. For some people, the risks are fine, but for others, they are not. Consider also the finances involved. Taking risks is one thing if the capital is there, but risking money that isn’t…. Well, that’s just not sound business.
What then is the ultimate goal? If it is for the thrill and there’s capital to invest, then becoming a speculator can be fun and potentially financially profitable. Just keep in mind that it can also be financially disastrous. If, on the other hand, the goal is to make a steady return on investment with minimal risk, then taking the approach of an investor is the wiser move. It may not be as thrilling, but the return is more reliable.