Back in the early 1990’s a friend who lives in Southern California who I will call “LT” started working as a real estate agent. He worked hard, he hustled, he schmoozed and he sold. LT is a total people person. I knew he would do well. The story could end with me saying that LT is now a top producing agent and that hard work pays off. But not only is he a really good agent, but he became an astute real estate investor and a successful part-time poker player. How did he leverage his realtor experience into investments and poker playing. Are there commonalities between playing Texas Hold ‘Em and investing in real estate?
A few years into LT’s real estate sales career, he started investing his savings and buying rental properties for himself. And he kept buying, and buying. He did this for nearly a decade owning anywhere between 5-10 properties at a time. He bought where he thought were opportunities for upside appreciation potential and/or would generate a good future rental cash flow – probably more based on appreciation potential. LT was bullish on the local S. California real estate market and like everyone in the US had access to easy and low interest rate mortgage financing during the mortgage boom of late 1990’s to early 2000’s.
During that time, many high income earners who were in successful corporate careers were super busy and didn’t buy investment real estate even though they were tempted to – particularly as prices increased. But they were very conservative in “diversifying their portfolios” (given many owned their own homes) and also did not want the extra responsibility of being a landlord. In the mid-2000s, LT sensed the market was softening, and over a few year stretch LT sold most of his real estate investment portfolio. He timed the market on both the buying and selling side nearly perfectly. A couple friends commented that LT had a lot of luck on his side. Although I certainly believe there was a bit of luck, but I believe more that LT possesses some attributes that led him to become successful in his investment decisions and timing.
Here is my opinion on LT’s real estate endeavors:
- LT was active in the market, knew the neighborhoods and was an expert in his field of real estate so he had high confidence in his opinions on the local real estate market.
- LT was able to take on some more risk than others given his personal situation
- LT had relationships within the industry and was aggressively seeking opportunities
- LT uses gut instinct, and trusts it enough to put his money where his mouth is
Many of us would be building large spreadsheets and running sensitivity analysis and other forecasting tools. I certainly recommend this as a core activity as a potential investor and I always do this exercise even when I know right away if is a good deal. You want to know your cash-on-cash returns, cap rate, IRR, effective gross income, GRM, and other metrics. I’m sure LT made some of these calculations. But what often happens is “analysis paralysis”. The future is uncertain, you may be bullish on an investment opportunity, but there are always 2 or 3 things that can go wrong. This is when many if not most people are reluctant to act or don’t have the gumption to just make the leap.
- Did LT have skill in timing the market perfectly? Yes!
- Did LT see a bit of luck in just how well he timed it? Sure!
- But what did LT have that most others didn’t have? He had courage and conviction.
I have such high respect for LT, and he remains a very good friend of mine. Sure his timing was remarkable, but I give him 100% credit for how things worked out for him in real estate. The fact of the matter is that he put money behind his belief that real estate would be a good investment during those years and it paid off for him. He is still doing real estate sales, but he also spending part of his time as a semi-professional poker player enjoying the fruits of his earlier labor.
I believe investing of any sort (stock, company, real estate, currency, start-ups, etc.) has many similarities to playing poker. In poker, you must be able to i) calculate probabilities under uncertain scenarios, ii) have a read of the situation of what others are doing, iii) evaluate each hand against your current chip count to figure out betting strategy, iv) determine pot odds and make decision around the risk-reward proposition, v) have courage to go with your read and calculations, and vi) possess just a bit of luck. You want to minimize the luck factor as much as you can to maximize your pot odds. Back in my day of playing home games with friends, I was a strong poker player. LT is one of the few poker players amongst my friends who I would hesitate in playing seriously against. But when we do, and he occasionally beats me….of course I tell LT that he just got lucky!
There’s no question IMO that poker is similar to real estate investing and similar endeavors. Look at how Dan Harrington describes poker:
“Like all variations of poker, no-limit hold ‘em looks like a card game. But it’s not, really. No-limit hold ‘em is actually a game of wagering base on imperfect information that uses cards to construct the situations for wagering.”
You could easily rewrite this to:
“Like all kinds of investing, real estate investing looks like a game of chance. But it’s not, really. Real estate investing is actually a game of wagering base on imperfect information that uses the real estate market to construct the situations for wagering.”
They are both the same in that they are about having a probabilistic approach to decision-making. Nothing is certain, but the more you know (about geographic locations, trends, taxes, etc.) the better your odds of winning. The same factors that are likely to lead to favorable outcomes (and incomes!) in one lead to success in the other.