What is the definition of speculative home buying -- flipping? Or is investing in residential real estate still speculative if it's over the long term? Is it buying a home you don't intend to live in? Or does a home, that is used for occasional vacations and rented out the rest of the time, qualify as a speculative investment?

It's the inexact answers to these questions that show that real estate speculation by residential homebuyers has a long way to go, to be understood by real estate practitioners, lenders, journalists, and pundits.

One thing the nation does know -- real estate is in a fever in many parts of the country, enticing home buyers, as many as eight to twelve percent, according to lender's figures tabulated by LoanPerformance, a San Francisco-based mortgage data firm, to buy homes they have no intention of living in. They may sell the home before they even have to make the first mortgage payment, despite a capital gains hit of 35 percent. While capital gains drop to 15 percent after a year, they can still make out in a market where home price gains are dancing in the double digits year after year.

And who can blame them? Since 2000, says the NAR, the national median price of a house has increased 33 percent, with 62 out of 129 metropolitan markets reporting home price gains in the double digits.

The National Association of Realtors makes the argument that although 23 percent of homes were purchased by investors last year, that only 3 percent of all homebuyers sell their homes within a year, suggesting that even speculative homebuying is still largely a long term investment. In fact, an earlier survey of all existing second-home owners, conducted in 2002, showed that typical respondents had owned their second home for nine years, despite evidence of change lately, with many homebuyers in Las Vegas and Florida, getting in builder lotteries for the purpose of flipping the homes before they close or soon after.

"Anecdotally, most of the stories we've seen on investment speculation have focused on the new home or condo market, and they've been confined to a handful of areas with very tight supplies of available homes and sharp double-digit price gains," Al Mansell, president of NAR said. "It's true that some people have made fast profits, but it's not to be expected. In fact, it can be risky, and prospective buyers need to be aware of the facts before they think about jumping in."

NAR's recent second-home study showed that 79 percent of investment properties were a detached single-family home. The lion's share of investment homes, 83 percent, were existing homes. "In other words, the typical investment property isn't a new home or condo as generally described in the stories on speculation," Mansell said.

In a normal market that is balanced between home buyers and sellers, home prices rise at the general rate of inflation, plus one-to-two percentage points. In those market conditions, buyers typically need three-to-five years to build up enough equity to trade up to a larger home; most people stay in their home for six years. "If you sell in a short time frame, you may not be able to recoup the transaction costs," Mansell suggests.

"Real estate investment is not for everyone. You should have sufficient resources to cover your expenses for six months -- things don't always go your way in the rental market," he said. "In addition, if the timing of your purchase coincides with the top of local market prices and you're hoping for quick gains, you'll be sorely disappointed -- and if you're not prepared to be a landlord, you'll need to find someone to manage the property for you."

On the other hand, market rents typically are higher than mortgage payments, but conditions vary widely. "Investment buyers need to study and understand the cash-flow scenario and home-price patterns for the neighborhood where the property is located," Mansell said. "A good resource would be a real estate professional who specializes in investment property and has experience in the neighborhood or area of interest. Realtor® members with certain professional designations, such as Certified Commercial Investment Member (CCIM), Certified Property Manager (CPM), or Counselor of Real Estate (CRE), can offer specialized services to investors."

Eighty-three percent of second-home buyers financed with a mortgage and made a median downpayment of 22 percent, the NAR study shows. Although 45 percent use savings for a downpayment, 29 percent used equity from a previous home. Nearly two-thirds of all second-home buyers purchased investment property.

"It appears most buyers like to have at least 20 percent equity in their property to avoid the need to pay for mortgage insurance," Mansell said. "The reason that buyers who make smaller downpayments have to pay MI is pretty simple -- those loans are considered to be riskier. The less headroom you have, the more likely things could go wrong."

Published: March 18, 2005

Use of this article without permission is a violation of federal copyright laws.

Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.