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Are You A Good Real Estate Investor…Or Just Lucky?

by Chris Clothier on January 8, 2013 · 21 comments

  
Lucky

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? 

Photo: Banspy

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{ 21 comments… read them below or add one }

Jason January 8, 2013 at 10:31 am

Chris,

Thank you for writing this article. It is very timely and very good. I asked an REi club recently how they choose which market they invest in. All they could give me was the markets the invest in and their success with those markets. That’s fine and dandy, but I want to know the why and how. Following others successes with no game plan is like sitting down at a blackjack table because it is “hot” or betting red in roulette because the last 8 numbers have been black.

Your last paragraph sums it up. The harder and smarter we work, the less we rely on luck. Or as many like to say “The harder I work, the luckier I get”. All the while they know the truth behind their success has little to do with luck. While my response deviated slightly from your post, your point is well taken.

Jason

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Chris Clothier January 8, 2013 at 11:25 am

Jason –

Thank for taking time to comment on the article and I don’t think you deviated at all from the post. Both of your comments were spot on. As investors, we are the only ones responsible for making good decisions and being good investors and no matter how we look at it – over time, we will need a little luck. Hopefully, as you pointed out, by knowing when we are good and when we are lucky will help us rely on luck a lot less!

Great points and again, i really appreciate the time you take to read and comment.

Have a great one –

Chris

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Steve Toohey January 8, 2013 at 11:27 am

Chris,

Thanks for the article, it got me thinking about a few things. I decided that I really don’t like the term “Luck.” I do believe that you make your own luck (or lack of it), and really what we are talking about is just a random outcome. It may be a matter of semantics to some, but to me, applying the somewhat mystical term of luck to anything I do is counter-productive. I don’t want to think that a costly mistake was due to bad luck, or that a success was related to good luck. You are correct that time will tell, but for me it will be whether I made rational or reckless decisions, not whether I was lucky or unlucky. Given all of that, I am certainly not saying I can control every aspect of an investment. A seemingly rational investment can certainly take a bad turn for many reasons (or vice versa), but an investor who makes their own “luck” can often make follow up decisions to reverse or at least salvage the situation.

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Chris Clothier January 8, 2013 at 1:09 pm

Steve –

I really appreciate the comments and the fact that you threw em down on the article for everyone to read. I’m not sure I like the word “luck” either, but I hate the word expert even more. A lot of people consider themselves experts without giving credit to events that occurred in their favor that were outside of their control. Even worse, when things go good in spite of bad decisions. I prefer when investors acknowledge being experienced and that the experience of time and many decisions has shaped them as better investors. I think that is a pretty rare happening unfortunately.

All the best to you and thanks again for the comments.

Chris

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Mike Z January 8, 2013 at 11:42 am

Chris
Love the article. Great Points.
My fear as real estate turns and we see years of the positive feedback loops we are going to see lots of people jump in for no other reason than it is hot.
If this happens I could very quickly become a net seller in a few years
Good Investing

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Chris Clothier January 8, 2013 at 2:27 pm

Mike –

Thanks a lot for reading the article and taking some time to leave your comments. We will see what happens in the next couple of years, but my best guess is that there will continue to be a fairly good amount of inventory for investors to purchase as some of the properties being bought today show back up on the market. In the meantime, in some polaces around the country investors are taking advantage of the boon in pricing and selling their portfolios for prices they did not expect to see for 10 years. These are interesting times no doubt

Thanks again for your comments. All the best to you in 2013.

Chris

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Michael January 8, 2013 at 2:12 pm

It’s 100% luck, no matter how many self affirming caveats we throw into the mix. Life is totally random.

Don’t think so? Let’s see you tell me when you are going to die.

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Chris Clothier January 8, 2013 at 2:29 pm

Michael –

That is certainly one way to put it!

I don’t know if I agree, but I definitely appreciate that you took the time to read the article and leave a comment.

All the best –

Chris

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Michael January 8, 2013 at 9:33 pm

Good article, Chris. I was going to write a long response about how I got really lucky and somewhat rich and ended up supremely dissatisfied with my REI career for a time. Then I figured out that my little human interest story wasn’t really a good response!

Perhaps another time.

I do enjoy your work. Always illuminating. Looking forward to reading more.

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Chris Clothier January 9, 2013 at 9:03 am

Michael –

Again thanks for reading and commenting and I will add that sharing experiences is often a great way to humanize what we are all talking about. I will add that all of my experiences, good and bad, are just that – they are experiences. I agree with you that there are so many random events that play into our successes and failures, but in the end all of that is what makes up our experiences.

Feel free to share yours at any time and don;t worry if they are good or bad. IN the end, you are where you are today and I like the fact that you say you were dissatisfied for a time. Hopefully that means you like where you are today as an investor.

Take care – Chris

Dennis January 8, 2013 at 3:47 pm

I like to claim I am brilliantly lucky.

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Chris Clothier January 8, 2013 at 3:59 pm

Hahaha, Dennis that is a great response!

Thanks for reading the article. I am quite sure there are a few more out there who lay claim to the same moniker!

Take care – Chris

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Katherine Grote January 9, 2013 at 9:00 am

Chris,
This is an awesome article. One of my biggest pet peeves here in Austin is the constant barrage of “guru’s” and “Get Rich Quick in Real Estate Using Someone Elses Money While Sitting on your Couch and Eating Bon Bons” seminars. Never mind the hard work and digging it really takes to be successful. Hopefully new investors will take your article to heart.

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Joshua Dorkin January 9, 2013 at 9:03 am

You mean I can’t eat Bon Bons and make a fortune doing nothing but watching TV on the couch? Don’t destroy my dream, Katherine!

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Katherine Grote January 9, 2013 at 9:07 am

@ Joshua…sadly I have tried it. It does not work. I just gained weight around my middle, not my pocketbook

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Chris Clothier January 9, 2013 at 9:16 am

Two things I simply can’t picture Josh doing…easting bon bons or having time to watch T.V., much less at the same time!

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Joshua Dorkin January 9, 2013 at 9:34 am

I actually would love some bon bons . . . been a long time since I had those things.

Chris Clothier January 9, 2013 at 9:15 am

Katherine –

Thanks so much for reading and writing a comment! I’m glad you liked the article.

I am always a little torn by the word guru and the way it lumps so many together. As in any profession, there are very good educators out there that, regardless of price, have the experience and ability to help others. What is ridiculous, in my opinion, is when someone does a handful of deals at best and wants to write a book, or an e-course, or charge money, and again I don’t care how much or how little, so they can teach others their secret forumla. Often the secret formula is I bought a cheap house and something happened where I made money and I need to charge everyone else so they can become insanely wealthy! Like I said, they are fooling themselves as to how good they are and too many people fool themselves into believing they need to follow.

Whew! That answer almost got long…

All the best to you in Austin and I hope you have a great 2013 –

Chris

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Robert Steele January 10, 2013 at 4:13 pm

My brother in law built more equity in his one home in Florida that he sold in 2006 than I have in all my rental properties. He is not a RE investor. He just happened to buy in the right place at the right time and moved at the right time. Whereas I have built my equity with blood, sweat and tears. So it seems to me luck has a lot to do with it. I’d say 9/10ths.

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Chris Clothier January 10, 2013 at 4:22 pm

Hey Robert –

Excellent share! Thanks for taking the time to read and write your comments. I think the only thing that could have made it better would have been if you said your brother-in-law has a tell all book for sale or a $997 program to learn how to make money in real estate! Just kidding…

Talking about luck in Florida. I sold a fix-up condo in South Florida in 2005 on a Friday. Hurricane Wilma ripped apart communities in south Florida beginning the following Monday including the condo building I had just sold. Pure luck that the deal closed on time and at full price, because we would have been in trouble if it didn’t. FYI – I’ve never written anything about it claiming to know how to “time’ a market based on the weather!

All the best to you –

Chris

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Robert Steele January 10, 2013 at 6:13 pm

Ha! Yes, the guru book on how to make hundreds of thousands by blind luck.

That’s pretty impressive timing on your South Florida sale Chris.

I have a similar story. About two years back I picked up a property at a Sheriffs sale. The bank found out a few months later and decided they would stop accepting the mortgage payment, that I was paying on time, and instead foreclose. It had a boatload of equity in it.

In Texas it can take as little as 21 days for the trustee to foreclose. The only reason I found out about any of this, 1 week before the auction, was because an investor contacted me wanting to buy it.

Thankfully I was already lined up to close on the sale of the property to a retail buyer. I think we closed 2 days before the auction. I would have lost tens of thousands of dollars. Instead I made tens of thousands. Luck?

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