It's vital to know the difference between speculation and investing! If you don't, you could make some very bad decisions and lose a lot of money.
Speculation is generally a high risk form of investing. It's done over a very short period of time, ranging anywhere from 1 day on the low end to 6 to 12 months on the high end.
From 2004 to 2006, investors speculated by buying pre-construction properties in Florida, Las Vegas and Phoenix. They'd put properties under contract with builders in these markets, then immediately offer them for sale once the builder finished construction six to twelve months later.
Some investors were fortunate and turned over some nice profits from the appreciation. However, many more were left holding the bag when the market softened and flipping for profit became nearly impossible.
Keep in mind that speculation is not based on cash flow. In fact, cash flow is rarely factored into the equation. The speculator simply wants to get in, get out, and get paid. Sometimes it works, and sometimes it hurts.
Investing, on the other hand, takes into account the reality of today. The purchase is based on current facts and information. In other words, nothing special needs to happen for you to be able to profit and benefit from your investment tomorrow. You analyze your deals; you negotiate if needed; and you plan your short- or long-term exit strategy. That means you're making money when you buy.
Unlike speculating, investing is usually low risk. Investors have a longer term perspective, generally 1 year or more. And, in many cases, their long term perspective can range from 5 to 30 years or longer. Great wealth is built by holding property over these longer terms, and it's also why you hear so much about the historically proven “buy and hold” strategy of real estate investing.
Finally, true investing is based on cash flow. Cash flow provides an immediate return on your initial cash investment. This is known as your cash-on-cash return, and many smart investors use this to compare one investment to another. Of course, there are other factors that play into the overall returns generated by your investment property, but the point is that you're generating a return today and not waiting for something else to happen tomorrow. And that means you're not basing your decision on future appreciation.