REAL ESTATE INVESTING VS. REAL ESTATE BUSINESS
Real estate is define as physical property. Typically we think of real estate as the land, the improvements, and the fixtures attached to that land. When people think of investing in real estate they often associate that with owning real estate. While that can often be true, and there are certainly many benefits to ownershit. It is important to note that what really matters is control of real estate. We do not need to own property in order to profit from it.
Part 1 :-
Take for example, a real estate agent, who helps to facilitate a transaction between a buyer and a seller. They never have an ownership interest, but we would not call them an investor either.
They have an active business that requires them to be continually hands-on, or the flow of income stops. So, we would say that they are in the real estate business, or that they have a real estate business.
It is important to understand that real estate investments, and real estate businesses, are two entirely different concepts. One is passive, and one is active. Someone who renovates homes for resale has an active real estate business, but is not necessarily a real estate investor.
Someone that is a landlord and rents out homes has passive investments, is a real estate investor, but may not necessarily have what we would call a real estate business.
Throughout the real estate industry there are a myriad of strategies, and typically they will either fall into the category of an active business or a passive investment.
In the chapters that follow we will go into explicit detail surrounding all of the core strategies, and of course. Whether they are an active business or a passive investment.
I will sometimes use the phrase “Real Estate Investor” even when talking about an active business. That probably sounds backwards, because it is.
Unfortunately, in the real estate industry we often inappropriately use the phrases interchangeably. And I know this sounds counter-intuitive, but it is easier to refer to the individual entrepreneur simply as an investor, rather than a “real estate business opportunity seeker”. It is easier to refer to a larger scale operation as a real estate business. Even if it is a business of holding passive investments, like a large portfolio of rental properties.
So, try not to focus too much on those terms, and instead look at the strategies themselves, and whether or not they are active businesses or passive investments.
Let’s also take the time to define speculation, one of the riskiest strategies. Speculation is neither a business nor an investment, and it is tantamount to gambling. theorizing is the tool of the inexperienced or the lazy.
Speculation is most often accomplished through taking ownership or control of a property with the only strategy being to sell for a higher price.
Typically cash flow is not analyzed, and it is often not a deal today. The speculator is hoping it will be a deal tomorrow. If it does not go up in value, the speculator is often stuck holding the property, and since they did not evaluate the cash flow it can often become painful to hold as it bleeds cash each month.
Speculators are likely to lose property to foreclosure due to the inability to maintain the debt service, and they are also the cause of artificially increased values or bubbles.
There are some instances where speculation can be done with lesser risk. Such as through the acquisition of an option, a voluntary choice to purchase at a later date. If a property produces positive cash flow.
In fact, some of the best rental property deals are the ones that produce positive cash flow and also have opportunities for growth in value.
However, most speculators are not acquiring those cash flow properties, they are simply jumping onto the bandwagon for what they see as “the next big thing”.
An example of dangerous speculative behaviour would be the tremendous amount of high-rise condo development in Florida around the mid-2000s.
Speculators were either purchasing new construction condos to immediately flip, or putting them under contract with the intention of reselling the contract soon after.
Many lost their properties to foreclosure because they could not afford the carrying cost. They lost their deposits with the developer because they were unable to close on the property or resell their contract. This irresponsible “investing” contributed to a bubble in the market that later resulted in an oversupply of vacant condos and the bankruptcy of many developers.
Owned real estate has benefits, but controlling real estate is equally valuable and may contain less risk.
A real estate investment is typically a passive activity, while a real estate business is active and requires ongoing management to sustain income.
Avoid speculation unless there is minimal risk or positive cash flow above your holding costs.
Speculation is akin to gambling. A business or investment based solely on speculation is operating on poor fundamentals and will fail.
Meta: Difference Between Real Estate Investing and Real Estate Business What sets them apart
Title : real estate business growing trips and know more about real estate investing