I think this is a great topic in today’s fear driven economy. Many people are afraid of the next great depression, $10.00 a gallon gas, and generally speaking, the end of the world. This has many investors holding on to their cash tighter and looking at investments even harder. All of which I agree with, to a degree. But what is the difference between speculating and investing? I could copy and paste the Webster’s Dictionary’s definition, however, I have better ones for you.

Speculating: You THINK you are going to make money.
Investing: You KNOW you are going to make money.

Many investors see the two words as interchangeable and as you can see from the above “Urban Detroit Wholesalers” approved definitions, they are completely different. Part of what fueled the real estate boom especially near the end (besides the easy credit) was speculation. Real Estate had appreciated so well for so long that everyone thought you couldn’t lose. This led to would be investors overpaying for property with the get in before it too late mentality. I knew many investors who would pay 110% of what the property was worth with the belief that if they held it for 6 months it would be worth more. This buying spree artificially raised the value of real estate and now we are experiencing the inevitable correction. This is speculating and if you get caught at the wrong time…. Ouch!

It is time to learn a new way to evaluate real estate deals. Part of what drove me to Detroit from the West Coast was the idea that you make your money when you buy (you realize it when you sell) and you need multiple exit strategies. The reason I’m still alive in real estate today is because I bought at huge discounts in a market where rent would support my mortgage payments. A gentleman investor out of Colorado has a fancy name for what I instinctively did. Investors, it’s time to look at the affordability index. This is the average Joe and Jane’s ability to afford the house you want to rent and or sell. So quit looking at comps or getting appraisals and start looking at the cold hard facts.

1. What is a price that the average Joe and Jane could afford in your area based on the average income? Take the average income and times it by 3 to get this number.
2. Now subtract 35% from that price for your profit. Now subtract any rehab costs required to bring it to perfect condition. That is your maximum offer and I recommend you offer even less.
3. Then make sure that the rental market can support your mortgage payment if you can’t sell the house. Let’s face it, crap happens sometimes and you need to be prepared for it.

Now, using the above scenario, is there any conceivable way you can lose money? That is the difference between speculating and investing. The moral of this is to quit being afraid and to start investing your money in real estate in ways that you cannot lose. Let the speculators be afraid while the investors harvest all of the profit.

Jeremy Burgess
Detroit Market Expert

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