Do you have friends who claim to win all the time at the casino? I once believed that too. In fact, I believed I couldn’t lose.
Growing up, as each of my friends turned eighteen they would all head to the local casino where games like Blackjack, Texas Hold ‘Em, and slot machines promised easy wealth and lots of fun. Each one always had the same story:
Blackjack was, by far, the most popular game. Over and over, my friends claimed to win big money at the casino. It truly made me want to try my luck as well. Being a math nerd (and clearly much smarter than my friends…) I devised a plan that I was sure guaranteed my success in Blackjack. I would simply start with $5.00 and double my bet each time I lost. When I won, I would start back at $5.00. The net effect of this type of strategy is that you always win a total of $5.00 when you finally do win. For example,
- Losing one hand of $5.00 but then betting $10.00 and winning would result in a net gain of $5.00
- Losing one hand of $5.00, losing the second hand of $10.00, and winning the third of $20.00 would also result in a net gain of $5.00.
- Losing the first, second, third, and forth hands would result in losing $75.00 but wining on the fifth would result in an $80.00 winfall, or a net gain of $5.00.
You get the idea. So, as young (proud) naive high school kids we headed to the casino on my 18th birthday to officially retire. I had figured out a way to beat the system and figured within a few weeks I’d have my private jet, supermodel wife, and private island. All beginning with $300.00.
Now, $300.00 was a LOT of money to me back then. In fact- it was everything I had saved from my summer job thus far. So imagine my joy when I played that first hand and won $5.00. I was on my way. The second round I threw down another $5.00 and won yet again.
I would buy a red Mustang. Not something too flashy – just something to feel good in.
Round three- another $5.00 bet.
No big deal. I’d just double my bet and play again. I had this in the bag.
$10.00 bet - lost.
$20.00 bet - lost.
$40.00 bet - lost.
$80.00 bet - lost.
$160.00 bet (had to borrow from a friend the last few dollars and…) – lost.
And like that it was over. I was broke in less than ten minutes. My dreams of the red Mustang and private island faded faster than my plummeting ego. When I look back now at the odds, I realize the flaw in my plan. The odds of losing that many hands in a row floated around 4%. Not a huge chance – but given enough time I would eventually lose. It was inevitable. Unless one goes to the game of Blackjack with an unlimited amount of cash – the plan will not work.
Because the house always wins.
The odds are always in the favor of the casino, though that isn’t the story that’s told. Even today, not a week goes by that I don’t see a Facebook post from a friend telling the story of their “big win” at the casino. Funny – I never hear the stories when they come home broke.
It’s human nature to want to share our victories and shy away from our failures, so it’s no wonder that our opinion of what works and what doesn’t is skewed from rumor and stories of success.
May the Odds be Ever in Your Favor…
Many real estate investors invest like they are playing a game of blackjack. In fact, for years – I invested the same way.
The method of investing that comes to mind most strongly is flipping homes.
I successfully flipped my first home and thought, “Awesome, I can do this! I’m a pro now!”
However, the next flip didn’t turn out as well. The market began to plummet and I was left holding a property that I couldn’t sell. Thankfully, I was able to rent the home out, refinance into a thirty year fixed-rate mortgage, and now receive good cashflow each month. However, I could have lost it all because of that deal. I was investing like a game of blackjack.
Don’t get me wrong – I love to flip houses. The thrill of finding an incredible deal, remodeling the ugly duck into a swan, and making a nice profit for the effort is intoxicating. However, I would estimate that the majority of individuals who get into flipping homes actually lose money on their first flip.
In fact – the odds of winning are probably better in blackjack than just jumping into a house flip – with a lot less headache.
The multitude of flipping shows has created the same situation that my friends did when talking about the casino – only sharing the successes and seldom the failures. I love those shows as much as the next guy but the simple fact is: reality TV is not reality.
Flipping houses, and all methods of real estate investing, requires more than simply hard work and determination. In order to win consistently over time – you must find ways to diminish the “house’s edge.”
In fact, and ironically – the solution for overcoming the advantage of the house is the same: Math and Exit Strategies.
Card Counting, Math, and Avoiding Security
If you’ve seen the film “21″ or are otherwise familiar with the game of Blackjack you are probably very familiar with the concept of “card counting.” In essence, card counting is a way to improve the odds of winning by keeping track of what cards have been played in a game of blackjack, tipping the odds of victory in the players hand rather than the casino. In other words – it takes mathematics to beat the system in blackjack.
The same applies to investing in real estate. The only way to truly create consistent profit is to understand the math behind the game. Not every deal is worth doing – you need to have standards for what constitutes a good deal. Furthermore – you must stick by those standards. The 70% rule is a good rule of thumb – but actually running the numbers through extensive analysis is key in any investment.
Finally, even with proper math trouble can still stir. Casinos spend a lot of time and money trying to catch card counters and when they are found they are quickly ejected from the casino and banned (and if you believe movies like “21,” often beat up in the process.) A good card counter often uses disguises, partners, decoys, and always has an eye on the pit boss as well as the door. They have their exit plan mapped – preparing for unforeseen but inevitable problems.
A good investor also has multiple strategies in place to prepare for inevitable and unforeseen problems. The market can rise and fall and without several exit strategies in place an investor is bound to be thrown under the bus when it happens. As I mentioned before – it almost happened to me and did happen to thousands of house flippers in the past five years.
If you want to enter the world of real estate investing – and especially house flipping – be sure to use your head and apply both proper math and multiple exit strategies in your endeavors. Don’t sacrifice your security for the chance of making a little more money – in the end, the house will always win. In order to take the advantage back you need to be smarter than the average investor and use sound business principles to build your business and achieve financial freedom.
Oh, and stay out of the casinos. As Dave Ramsey says, they are just a “tax on the poor and stupid.”
Do you have any similar stories (Blackjack or Real Estate?) Share them, or any other comments, below!
Image Credit: ImagesOfMoneyReal Estate Investing Like a Game of Blackjack by Brandon Turner