Real estate investment and speculation

What is the difference between investment and speculation?

Investment seeks returns from the yield of an asset:

interest from bonds, dividends from stocks, rentals from real estate.

Speculation seeks to profit from a change in the asset price due to a shift in supply or demand.

Gold, for example, yields no interest income, and one holds it for the gain in the price.

People both invest in and speculate in real estate, often with the same property.

The yield of real estate can be implicit; one invests in one’s own house.

A homeowner obtains an implicit rental yield as housing services.

Real estate asset ownership can take varius forms.

1. The purchase of real estate properties:

houses, apartments, commercial r.e., farms, mines, forests.

Variations: one’s own house, vacation houses, rental properties.

A variant is a time share.

2. The purchase of options to buy property.

This includes leasing with an option to buy.

3. The purchase of units of a partnership.

Investors are typically limitd partners.

The general partners run the business.

All profits and losses and income flow to the partners.

But limited partners have passive losses that for taxes only offset passive income.

Limited partnerships have tax advantages in getting a share of depreciation, tax credits, and tax deductions, but they tremendously complicate income taxes, adding many forms.

A special case: low-income housing tax credit partnerships.

Often a firm has many partnerships, started in various years.

4. The purchase of shares of stock or of bonds of real-estate firms

such as construction, forests, and ownership of real estate.

Mining stocks are a separate area of investment.

You can also buy shares and bonds of government sponsored enterprises,

Fanny Mae (FNM) and Freddie Mac (FRE).

5. The purchase of shares in a REIT: real estate investment trust.

It is a company that owns and manages real estate.

It does not pay corporate income taxes, all profits flowing to the share owners.

6. The purchase of shares in a mutal fund that owns REITs.

Some examples:

Cohen and Steers

Fidelity Real Estate Fund

A special case: indexed real estate funds, passively managed,

such as Vanguard Real Estate Index fund, or

iShares Dow Jones US Real Estate (IYR)

Cohen & Steers Realty Majors Index Fund (ICF)

There are also REITs which hold mortgages.

7. Bear-market funds, which sell short or own put options.

These profit when real estate falls.

Main example: Profunds Short Real Estate, SRPIX

8. Derivatives: call and put options on real estate stocks, such as construction firms.