Wait…don’t answer that question until we get to the end of the article! Whether you are a good real estate investor or have been simply lucky, each of us will have a different definition of both and when you read where my inspiration for the article comes from, your definition of both may be different too. Let me just start by saying this: when it comes to real estate investing, the old adage of “it’s better to be lucky than good” definitely does not apply…at least not for very long.
I Think I am Supposed To Write About This
I get inspiration from different places for articles and this one is certainly no different. I had this nagging feeling in the back of my brain that I needed to connect three different sources for inspiration into one article. I had this feeling that I was supposed to write this article and look at these phenomenon of supposed “experts” who have only really been lucky, very good investors who find success in almost any market and the trends that drive them both. So what three sources inspired me?
Recently, I was reading the Wall Street Journal and an article by Jason Zweig jumped out at me. It asked an interesting question of investors. The headline was “Are Your Brilliant or Lucky?” Now the article has nothing to do with real estate, but I saved it anyway, because it reminded me of a presentation I had heard a few months earlier. I had never met Steve Cook before, but last March I was in Denver, CO. for the Bigger Pockets Real Estate Investing Summit, and I had the opportunity to listen to a talk he was giving about the current state of the real estate market. Something he said had stuck with me for all these months. He was talking about the rebounds occurring in several markets around the country and how all of the data showed that there was no logical reason for the rebounding prices or the demand for property.
I had logged these two things into the back of my mind in a kind of “To-Do” folder for the future. I still didn’t feel like it was time for me to write an article yet, just that I wanted to tackle a topic around investing and why some things happen and others don’t and do we realize when we are making good decisions and when we are just plain lucky. And then, I ran across some comments in an over-seas article that prompted me to go ahead and put it all together.
It seems that some people want to make U.S. real estate appear as if the land of Milk & Honey is really the land of never ending cash flow Victorian villages. Most of the time, those selling this fable are not U.S. citizens and their message is not intended for U.S. citizens. The message is intended for over-seas investors and it is carefully crafted to build upon preconceived ideas that you can make money anywhere and anytime in the U.S. real estate market. I get calls from time to time, although they are more frequent today, from foreign investors who need help. On a call with one investor, I asked him how he came to own some of the horrible properties he had purchased and he recounted his story and sent me some links to articles on the man he had purchased from. Those links contained articles that were the final piece to my puzzle and is what pushed me to sit down and write. In one article, about a Real Estate Investment Guru gone bankrupt, another overseas investor who runs a monthly meeting of local investors explained that the bankrupt guru had only done a handful of deals and having experienced a run up in property values, mistakenly thought of himself as an expert while in reality his early success was due to luck.
So why do some people do the exact opposite of what all the data tells them? Why do we see so many people, both in the States and over-seas, do a handful of deals at best and suddenly want to tell the world how brilliant they are at investing? Why are some investors so ready to seize on the stories of untold riches to be made and ultimately end up losing? I think the answers lie in how and why we process information.
Filtering The Good From The Bad And The Just Plain Lucky
To really dig into the question will take much more than one blog article but it essentially boils down to instant gratification, unreasonable demand, the need to “do things” that other people are doing and our absolute belief that past performance is an indicator of future success. I would also add one more thing and it is very introspective so don’t take offense as a reader. The easiest person to fool…is our self.
Steve Cook’s presentation pointed out that in several markets around the county and most notably Florida, there were pricing rebounds and demand curves occurring that seemed completely counter to the data. He showed where investors were making up very high demand yet they were purchasing based on their own personal demand for real estate and not on market dynamics that showed a high probability for success. In other words, limited job growth, persistent unemployment, years of over building and a massive backlog of delinquencies and foreclosures should not lead to a run on real estate pricing. There may be cities and certain sub markets in Florida where investment makes perfect sense and you cannot write off an entire state market, but the economics on the ground should not be leading to a huge run on real estate and prices should not be rebounding and in some cities going up. So why are they? Demand.
Investors of all walks believe that now is the time to invest in real estate and they want to own property… and they are buying. In some cases, properties are being bought for second homes and in some cases foreign investors are buying properties for them to stay in when they visit or relocate for short periods to the U.S. In others, investors are buying to turn their properties into long-term rentals, as they are seduced by what appear to be no-lose numbers. What they fail to calculate is that population growth and demand for rentals is not growing at the same rate and when they are forced to rent their property at a fraction of what they thought they would be receiving, their investment and their return sink quickly. That of course is if they can get and keep their property rented at all. Just ask the thousands upon thousands of investors who believed the Toronto, Canada condo market could go on forever. There are thousands of condos sitting vacant in Toronto today that were sold at exorbitant prices and many investors are seeing their investment dreams and their funds go up in smoke. Who will end up being judged as good and who will end up being judged as lucky will pan out over time, but many will be judged as neither.
In the case of over seas investors getting duped by their own into believing fairy tales spun about the U.S. real estate market, I can only say that investors have to do more due diligence across the boards. Simply because one person is having success does not mean every investor is going to have success and often times whatever success they are having has to be measured against strategy. That goes for any investor who is following the advice of someone else. If a person is motivated by some other purpose whether it be financial gain or some other reason, they are sometimes capable of even fooling themselves that they are an expert.
I know countless numbers of individuals who see dollar signs when they think they can “sell” their knowledge and “teach” their investment methods. In reality, often it was the method which they were using that led to any success, real or on paper, they were having and not because they had figured out the secret wealth strategy of the ultra-rich like so many sales letters promise. Unfortunately, many times people are so accepting of a great story and a fear of missing out coupled with a desire to do what every one else is doing leads to poor due diligence and the need to call a local real estate expert for help.
In Jason Zweig’s Wall Street Journal article he pointed out several ways that investors can protect themselves from the trap of looking backwards to guess future returns. I really loved one statement and I highlighted in the article:
“Outcomes don’t just grab your attention more than process does; they are much easier to measure. So most investors look for top performance first. Only then (if ever) do they ask how it was earned.”
I think that is such an important statement regardless of what you are investing in today. Outcomes, the numbers themselves, are usually attention grabbing and as investors we often think that it is easy to measure the outcomes of two different investment opportunities. In reality, the process from neighborhood selection to renovation and most importantly sales technique or property management all play such a vital role in determining what the final numbers will be on an investment property.
Will You Become A Good Real Estate Investor Or Rely On Lady Luck?
Your willingness as an investor to dig through the dirt a little bit and get below the surface of an investment could very well be the difference between becoming a good investor or simply a lucky one. Investors also have to remember that luck absolutely plays a part in every successful investment and anyone who says otherwise probably believes that when things go well it is due to their superior skill and when things go wrong it is do to some unforeseen circumstance. That is simply not the case. I have experienced both sides of the coin as luck has played a critical part in some of my success and being a dummy, beginner played a critical role in my failure. But today, I consider myself to be much smarter for all the success and failure I have experienced I feel comfortable saying that I am a good investor thanks to the process of getting there.
As you become more a more experienced investor luck will have less to do with your success because you will have time and experience on your side. You will have developed your strategies or your preferred teams and vendors and will know which decisions you make have the biggest impact on your success. If you are willing to be patient and not follow the crowd or the newest “guru” selling secrets, then you have a real opportunity to be successful. There are a lot of real estate investors whom many of us believe are taking some big risks today and then there are some real estate investors taking this same opportunity to solidify their wealth. As always, time will tell us all who was the good investor and who is lucky…or who is unlucky.
What examples have you seen or experienced of being a lucky investor? How do you define a good investor?