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While researching a speaker at The Realty Investment Club of Houston (RICH), we were not expecting to hear a guru with great insight. Then we heard an inexpensive, focused, well-educated guru make a statement that reflected the understanding of corporate finance and its application to purchasing single-family real estate. Make money fast. Get rich quick. Those are the claims of most gurus. Especially late-night gurus. HoustonRealNews does not approach nor present to its readers these expectations from a career in real estate investing. In fact, we believe these claims to be entirely false, and totally misleading. Further, we believe that, for the vast majority of actual wealthy real estate investors, their success is due to brains and hard work, not guru education. Why do we believe that? Efficient Markets. EFFICIENT MARKETS Efficiency in a market means that an investor can only reap a risk-adjusted return for his investment, no more, no less. We absolutely believe that the market for Residential Real Estate is inefficient. We believe that the market is inefficient due to asymmetrical information, regulation and the lack of access to capital. But forget about what those mean. The point of "inefficiency" is that all markets are inefficient in some way, so there are always opportunities for excess investment returns when compared to investing in bonds, or the stock market. Real estate is no different. But what happens when the causes of inefficiencies are well-known and widespread? Investors look to take advantage of the opportunities. Financiers make capital available. Inefficiencies now become less inefficient - competition drives the price higher and returns are lowered. Real estate investing information is ubiquitous. It can be found inexpensively. It is still an inefficient market, huge opportunities still exist. They get harder find as the market becomes more efficient. Competition will make it harder to keep the absolute home runs. Gurus preach widespread "home-run deals" and then are paid to spread information, which helps ensure that home-runs are hard to find. A GURU SPEAKS "Risk Avoidance is how you will be successful" is how a guru started a segment of his seminar. We thought to ourselves, did he slip up? Did he mean to say, "Make money fast using my system! There are deals everywhere!!!" No, he meant what he said. The key to earning money in real estate is understanding Risk vs. Reward. Market Theory teaches that the greater the Risk, the greater the Reward the investor must earn to accept the risk. In that regard, making real, excess returns over time is not about hitting the home-run deals which are difficult to find. We understand the attraction. Look for high-risk, high-return, reap the benefits. Unfortunately, several high-risk deals can make a rich man poor. As a former RICH president told us, "If you are builder and have not gone bankrupt, then you are not really a builder." Builders do big land deals. And, they get in financial trouble because of it. Investors can earn excess returns simply by finding good deals that have low-risk, instead of high-risk. Baseball continues to provide a good analogy. Home-run hitters are great. But not all of them have Albert Pujols' batting average. Most of them miss alot. Over the course of a season, scoring runs is about consistent hitting and smart base-running. Real estate investing works the same way - you can make excess returns over time working the lower risk deals. A high-batting average singles hitter corresponds to lower risk, lower return deals (Pujols is a low-risk, high-return player - until you factor in the price - he makes a lot of money which lowers the return for his ball-club). The insight offered by the guru was not about great deals. He was speaking about choosing the lower-risk deals that still offer good returns. He was talking about an investor understanding risk vs. reward. Naturally, after mentioning Risk Avoidance, the guru went on to talk about his students' home-runs. If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time. Related Articles -ADVANCED EDUCATION OVERVIEW - Real Estate as a Market Buying Without Title Insurance Cash Flow Vs. Appreciation and Housing Affordability Cash Investing - the opposite of No Money Down Deferred Taxes and Profit Calculation FHA "Flipping" Guidelines Foreclosure Deeds and Title Insurance (Trustee) Future Topics Being Drafted Gurus and Market Efficiency KHAP v FEMA v Section 8 Passive Income for Long-Term Wealth Short Sales Tax Benefits of Real Estate Investing Return to Listing Return to Investor Education |
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