so it seems to me that land banking is speculation then. i don`t know how that industry works very well, but from what i gather the original company (Walton is the one i`ve heard of most) makes their profit when the land is syndicated, but the individual investor only gets a return when the land appreciates in value. is this correct? and if so, is what the Waltons do speculating or just what the individual does or both or neither (based on the criterion of needing an income outside appreciation)
QUOTE (thomasbeyer2000 @ Nov 18 2008, 07:52 PM) Speculation: you buy an asset that MUST go up in value to make money ! Example: gold, most non-dividend paying stocks, buying call or put options, flipping condos, expensive single family homes, NFL franchises, diamonds, paintings, antique cars ...
Investment: you buy an asset with income, that even in a flat or declining market you can make money with !
If you buy an asset with a 20% down-payment, and no positive cash-flow for 10 years, with:
a ) No appreciation (equity upside) you have DOUBLED your money as the mortgage has been paid down 20% !
b ) 20% price increase (less than 4% annually compounded, below Canada`s long term average !!), you would have TRIPLED your money.
c ) 30% price increase (less than 6% annually compounded, about Canada`s long term average as house prices in Canada have doubled every 15 years in a normal economy !!) you would have made 250% on your money.
d ) 40% price increase (slightly higher than Canada`s long term average as house prices in Canada have doubled every 15 years in a normal economy, and AB has a better economy than the rest of Canada !!), you would have made 300% on your money, i.e. quadrupled it!
How about an asset decrease:
e) even with a 20% market DECREASE in 10 years you would have lost no money ! Wait 15 more years (assuming 25 year amortization) and you would have paid the mortgage to zero and quadrupled your money (from 20% to 80% of property value)
f) even with a 50% market DECREASE in 25 years you would have have paid the mortgage to zero and made 150% on your money (from 20% to 50% of property value)
WOW .. that is an investment !!
Of course, we appreciate equity upside .. and usually get it in a healthy market over a longer period of time ... but I would not call this speculation .. just common sense ..
The goal is, of course, that you have an asset that allows you to sleep at night and collect enough (positive or zero) cash-flow allowing you to hold 5, 10 or 25 years !