Are there any subtle or discernible differences between merely acquiring real estate vs investing in real estate? Does active speculation in the property market constitute sound property investing? On the face of it, there doesn’t appear to be any difference and speculation, as an “investment strategy” is so widely practiced and accepted in this market.
One could even argue that because the values of property in this market are perpetually on the rise, any acquisition in property is a qualified investment because the likelihood of capital gains is nearly guaranteed. Of course, those who may make that argument have not factored the opportunity cost of the acquisition or the likelihood of price stagnations in a depressed market as happened in the last quarter of 2017.
Acquiring vs Investing in Real Estate: Is there any difference between the two?
So perhaps this is a moot conversation. However, it is obvious that without a guiding philosophy and approach, the acquisition of property is just that, a means to an end without the clear, targeted objective of wealth creation.
It is the goal of wealth creation embedded in the philosophy and motivations of the buyer that makes the key difference. It goes without saying that any real estate investor will most likely have acquired real estate.
Because you cannot invest without acquiring, in a real sense, except for the respective motivations behind the purchase; and the approaches applied, there is no difference between merely acquiring real estate and investing in real estate. With that said, not everyone who acquires real estate is a real estate investor. And to demonstrate this, we shall consider the questions below:
- Is your home an investment?
- What are the real estate investors motivations?
- Why isn’t speculation a bankable strategy?
Are Permanent Homes Investments?
By volume, next to vacant land, homes are the hottest ticket item on the property market in Kenya. Indeed, the acquisition of vacant land as a precursor to constructing a home is the most popular form of vacant land purchase. Naturally then, the acquisition of homes is a good point from which to debate the similarities and dissimilarities of acquiring real estate vs investing in real estate
Many property buyers contend that a permanent home is the best investment. Granted, securing a home is an endeavour well worth a hundred times the emotional security it provides. However, if you follow the classic meaning of the word “investment” then the test is whether the property is generating a return or not. In so far as homes don’t do that and are not principally acquired for that reason, then they don’t fall into the classic definition of the word “investment”. The reason why the value of one’s primary place of residence is excluded in calculating an individual’s worth is that:
- Homes are deemed to be “permanent acquisitions” in their very nature, and;
- Homes do not generate income.
True, their value may increase over the years resulting in capital gains down the road. Others will even proffer the argument that by saving on rents, homes “add” to cash flows (in truth, they don’t but instead they merely reduce cash outflows which may very well be consumed through other liabilities, lifestyle choices – just saying!).
There are exceptions though so rather than end up in the weeds arguing this one out, let’s see a few. If a permanent home gets disposed at a significantly higher price than what it was acquired for, then yes, it may qualify as an investment. Specifically, if the cost of acquiring a new permanent home is less than the value of the old one you currently live in, at the time it is sold, then the old home was indeed an investment.
In the west, it is common to find duplex homes which allow the owner-occupier of the home to rent out a portion of the property to a tenant enjoying both the benefit of living in the property while earning an income out of it. Closer home, it is not uncommon to find owner-occupiers who construct what we typically call “extensions” in order to earn a rental income. In addition, it is also not uncommon to find owner-occupiers renting out rooms or the domestic servants quarters to tenants.
For the other reason that there is no predetermined “exit strategy” to homeownership, and that homes ultimately have to be replaced in the event of their disposal – unlike other properties – homes, especially those held as their owner’s primary residence, by and large, are not considered as investments.
The Buyer’s Motivations in Acquiring the Property
Despite the feather-ruffling arguments that may be elicited from these views on home-ownership, a deeper understanding of motivations in property acquisition may clarify the difference between property (home) buyers and real estate investors. The key distinction between the two lies in their motivations – one the need to create wealth and the other the need to meet the needs of emotional security.
There is a convincing argument to be made about how meeting emotional security bolsters individual’s ability to focus on wealth creation and it cannot be gainsaid just how much achieving emotional security impacts on the individual’s ability to plan and execute higher financial goals.
The other distinctions include:
- Property buyers tend to make acquisitions of a more permanent nature while investors make acquisitions with fixed timelines and clearly delineated exit strategies.
- Real estate investors follow a well-regimented, analytical approach to making their acquisitions with consideration of a wide array of observable market knowledge, trends, data, statistics and dynamics guiding their decisions while property buyers tend to acquire properties more along the lines of sentiment, tastes and preferences, lifestyle choices and other subjective (emotional) criteria.
- Real estate investors consider a mix of properties that can generate both long-term capital gains as well as properties that generate periodic cashflows while property buyers tend to focus more on properties that for personal use. Real estate investors tend to consider a much broader and diversified portfolio of property investments including multi-dweller residential properties, commercial developments, early adoption in off-plan schemes and subdivision of vacant land, institutional-use properties and the full array of other opportunities in the market. Property buyers largely consider residential or agricultural-use properties.
The differences in knowledge of the marketplace between these two groups is as distinct as night and day with investors very broadly informed about the property market while property buyers have limited knowledge which tends to be location-specific or centered on their key interests only
Why isn’t speculation a bankable strategy?
In many property advertisements in this corner of the world, you will often come across the phrase “good for speculation” as part of the property pitch. Speculation is synonymous with the words gossip, hearsay, gambling, conjecture, rumor, assumption, and guesswork. So while many people may have inadvertently made some gains off the speculation phenomenon, it is an approach driven by hope and not any applied knowledge of the market or any key investment considerations or sound tactics.
Just like gambling, at best, continually relying on a speculative approach yields an aggregated zero-sum when gains and losses are factored against inflationary pressure and the opportunity cost of the property investments made.
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Acquiring vs Investing in Real Estate:
- Diligent property investors, as distinguished from mere property buyers, tend to be more analytical, calculating and singularly focused on the value of the transaction’s capability to generate capital gains and/or yields, and not just on the emotional satisfaction that owning the property would provide. Their “why” is king!
- The motivation behind acquisitions is the most fundamental aspect of real estate investing and is perhaps as important as how property ownership is secured, if not more. Motivation distinguishes the savvy investor from the mere property buyer.