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When you read or listen to discussions about "investing" in single family housing, the words are often used interchangeably, and there is no distinction made between "investing" and "speculating". But in reality, there is a big difference. And it can mean the difference between owning a single family real estate portfolio that earns ongoing income, or having a long line of foreclosures listed on your credit report.

Unfortunately, "investing" and "speculation" are often though of as the same thing in the minds of many people. During the real estate boom at the beginning of this century, the media often used the terms interchangeably. As a result, many people who ended up losing their "investment" portfolios ended up in foreclosure.

A simple distinction would have gone a long way in helping people to distinguish which strategy they were really using. The term "investment" includes the concept of something becoming more valuable with time, or at a later date. So there are the built-in concepts of improvement and longevity. Speculation, in contrast, involves trying to make a large profit in a short amount of time, and implies that there is an element of guesswork

One of the contributing factors to the recent overheated single family real estate seller's market was the amount of speculation that was occurring in the new construction market. Although people talked about it as "investing" in new construction, it was actually short-term speculation that the price of a new home would increase between the time the contract was written and the time the house was completed and ready for closing. That was in fact the case for several years while interest rates for single family mortgages were kept artificially low by the Federals Reserve's monetary policy.

In fact, it happened consistently over a long enough period of time that there appeared to be no more "guesswork" involved. It became fairly predictable that people could make a profit by contracting for a new home during the early phases of a development, then selling at after several price increases when the house was completed four or five months later.

But then the "bubble" burst. Since wages weren't increasing along with the price of housing, the artificial affordability that the Fed provided by meddling in the "free market" and keeping interest rates low finally could not be sustained. At this point, the "speculators" ran out of buyers to profit from. People could no longer afford to buy, even at low interest rates. So speculators allowed their houses to go into foreclosure (a relatively easy decision, since these were not houses that the speculators were living in themselves.).

Investors, on the other hand, who made purchase decisions based on whether or not the property would cash flow, are in a better position to withstand the down market. Even investors who may have been hoping to continue to "flip" properties can change strategy to "rent and hold" due to a long term "investment" business plan, instead of a short term "speculation" business plan.

Author and entrepreneur Bernz Jayma P. is the owner of a financial blog http://www.Invesmint.com, dedicated to helping people expand their knowledge about their personal finances. Learn up to date investing strategies and retirement planning by visiting http://www.Invesmint.com.

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