How Studying Poker Can Help Investors Play Their Best Real Estate Hand
My brother lived as a professional poker player for over a year before joining me in Kansas City to work in real estate and eventually becoming our property manager. He spent many a late night playing multiple online games at once, one time winning over $13,000 in a single tournament.
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Indeed, had it not been for what poker players know as “Black Friday” (when the government cracked down on online poker), he may not have never have joined us.
To those who missed the poker craze or never saw Rounders, poker is not a game of a chance. The best players know all sorts of strategies, as well as how and when to bluff and how to read people. But the most important thing is that they know the numbers.
What are your odds of winning a given pot when you have an inside straight draw and you believe the person you are going against has a pair of overcards? Are your two aces enough to win against two other players? What about three? Four? If you are stuck with the big blind and someone raises pre-flop, is it worth paying more to see the flop if you have a weak starting hand? Et cetera. (And yes, he almost exclusively played Texas Hold’em.)
What’s key in all this is that odds are just that, odds. You may play a hand perfectly, but that doesn’t mean you are going to win it. It just means that you will win it more often that not. People “suck out” (get a lucky card on the turn, the fourth card dealt, or the river, the fifth card dealt) all the time.
The key with poker is to not second guess yourself if that happens, as well as not get overconfident if you are the one sucking out. You should know whether you played the hand well or not, whether or not you win or lose.
It comes down to variance. The best poker players will not win every hand. Indeed, the best poker players wouldn’t even think to try that, as if they did, they would certainly not be the best poker players. But furthermore, they won’t even win every hand they play perfectly.
And they know this going in.
The key is to pick your spots and win more often than not.
Picking Your Spots
All this means is that it’s much more important to win one big hand than 10 really small hands. To rake in the blinds several times in a row doesn’t matter much if you go all in and lose on the following hand.
In real estate, how this translates is simple: You only want to buy the best deals, and those are usually few and far between. It’s not necessarily waiting for the best hand. In poker, you will become predictable. In real estate, you will miss some great deals that were made great more so because of the terms than the price. But the key in real estate is to view a lot of properties, make a lot of offers and only buy the best ones available.
Picking your spots may be a bit obvious, but the more obscure similarity is understanding variance.
Real estate investment is an inexact science, to say the least. No matter how much due diligence you do, you can still miss something. Perhaps it’s something rather large: The property won’t sell or rent for as much as you thought, or there is more rehab to do than thought, etc. Not every deal can be a winner.
But this is a two-way street. Let’s say some investor buys a property sight unseen while doing just a cursory look over at the comparables and no due diligence. And then it works out great, and he flips it for a big profit. This is like a newbie sucking out the river. Yes, it worked well for him this time, but it will not and statistically cannot work out well going forward on a consistent basis.
Gamblers always lose, so they say. That’s because the house has the statistical advantage, and even if a gambler starts off ahead, in the end, the gambler will come back in line with the probability of the game, and that probability is to lose over time.
Of course, gamblers are to speculators what poker players are to real estate investors.
We will all regress toward our mean, or namely over the long term, we will do as well on average as we are good at what we’re doing.
So variance is a critical concept to keep in mind. This is true when you get a great deal, but do it despite either finding, analyzing, performing due diligence, rehabbing or selling/renting it poorly. We had a bad apartment purchase turn out well in Dallas because of appreciation. It’s important that we didn’t learn the wrong lessons from that. Don’t let a good deal go to your head! Always look at what you did wrong and try to improve.
But it also goes for the bad deals that slip through the cracks. Don’t let them get you down or crush your confidence. They happen to even the best investors. The key is having a high average because variance strikes us all from time to time.
Jim Collins noted in his book Great By Choice that companies that were successful during volatile times didn’t have more luck than companies that weren’t successful. In fact, both sets of companies had about the same amount of both good and bad luck. The successful companies simply had a better “return on luck.” In other words, the better companies simply performed better because they were, on average, better.
Variance strikes us all, and therefore it’s critical to think of things in the long term and not get caught up in the short term ups and downs. Don’t get too high or too low, and always be looking for what you could have done better.
What do YOU think investors can learn from the game of poker?
Let’s talk in the comments section!