Can you gain an edge and outperform when it comes to real estate?

Warning: Very, very long post so please skip thread and save time now if not interested in a long read.

Its something you come across and read about in the share market world but not often debated about/discussed with the asset class of real estate. I've recently had an investors night at my place and we had a very interesting discussion about 'gaining an edge' when it comes to investing in real estate. Not all who attended were in real estate. Some were in stocks and on line businesses. I thought I'd post some of my own comments on what I believe is possible when it comes to gaining an edge in real estate.


I have often looked at investing from the POV of how can I get an edge in this game over others to be that little bit more in front and get the deals that little bit quicker or at a lower price than others or choose the best areas I possibly can with biggest upside profit potential. Just like the casino, they never lose because they have a built in edge. The best stock investors and traders all have their own unique edge to be able to outperform average results.

So how do I believe I have gotten my own edge (which others can do if they aren't already) when it comes to real estate? This can be applied to almost any budget (within reason) so its not just for those who are massively cashed up. This is only what I have found works for me to gain what I believe is 'an edge' in this game. It may seem overkill and probably is, but I think its what's gotten me what I believe is 'an edge' over most others in the market. It's not supposed to be a recipe or rigid framework for others to follow but it may provide some things to think about particularly for newbies. I'll try to keep this as short and summarised as possible. I have just had to go back and delete massive amounts as it was getting waay too long. This is a summarized version and I've had to leave out other points to reduce the size of this post.

1. Have a plan. Determine your goals, your risk profile and what strategy/ies you think will best get you there. This can always be reviewed and as time goes on. I have found that having a clear direction and focus already starts you off ahead of many others. Gives you a sense of purpose and confidence and a solid direction. For me, reading most everything in terms of Australian books on Re is a must. I feel over the years many of the monotonous aspects mentioned over and over again in the books has reinforced some key points which has more than likely saved me from losing a lot of money. That in its self is extremely valuable imo. Not to mention, the massive amounts of knowledge you will gain from reading different perspectives and then you will be able to form your own informed opinion over time and not be reliant on others.

2. Build a strong team: I am including the players I believe make the largest difference.

- Broker/Banker: Having a broker or relationship with a bank can be the difference between you getting the loan to buy the deal or missing out and someone else getting it.

- Lawyer: Finding a great conveyance/lawyer can also make a big difference. I have had a few deals where I managed to get an competitive advantage simply because my lawyer was able to get the complicated contract drawn up faster than others and submitted, getting my offer accepted when the others were just simply slower.

- Accountant: Needless to say, a good accountant is essential. Asset protection and tax efficiency to start with. More money in your pocket means more money to invest with/buffer available which reduces risk. Anything that lets you stay in the game longer with less risk and stress is an edge over others imo.

- REA: Many people underestimate how important it is to build mutually beneficial relationships with agents. I know without a shadow of a doubt, just this one factor alone can bag you some good deals and profits before others even see it. People who think this doesn't happen are living in la la land. It happens all the times in various amounts. Key point here. Learn to network with many REAS and build good relationships. It can make a huge difference. If that is not an edge (having access to a deal before the broader market does) then I don't know what is.

3. Market Due Diligence/growth drivers: This is huge, huge, huge. Being able to determine what are the growth drivers for an area, supply and demand for an area, current value based on similar stock in the area and then cross referencing that with other price points of neighbouring suburbs and their supply and demand. This can reveal some very interesting insights (markets within markets, ripple suburbs, value add potential stock) and lead you to be able to identify before others do where value is at for certain stock types and price points and make better, lower risk investment decisions. There is a lot to cover to for market DD so ill just say that taking the time to thoroughly learn how to do this well can 100% get you an edge over most others when buying. Will it every time? Who knows. But over multiple acquisitions I believe it definitely will. Not to mention, is a massive step in order to reduce risk, again keeping you in the game longer as well as not using up your psychological resilience. Each time you lose money, buy a poor deal, a dud, a Gladstone disaster etc, your psychological resilience gets eaten up bit by bit which for most people will influence their future performance which can be a big problem to overcome. So its best to reduce this from happening as much as possible.

4. Add value potential: Another biggie (and huge topic) I believe which can get you an edge over others is if you are able to identify a certain stock types in an area where value can be added to a stock in order to create profits which others don't identify, or they don't identify it as quick as you can. Could be renovation, subdivision*, development** or even simply being able to add a room to a great floorplan for increased rent/potential higher sale profits in the future. (* and ** is a warning that those strategies need to meet your own risk profile.

5. Network with others: I have had many good deals brought to me over the years simply because I have always been big on networking regularly with all kinds of players in this game and especially with players on the ground. Reas, brokers, town planners, builders and other investor friends who have alerted me to deals which weren't on my radar at all. If I can get these people to alert me to potentially good opportunities, and the average Joe investor doesn't have this network to flick them these ideas/deals, then my competition at attacking a deal is less and I potentially have a greater chance at being successful at the deal. May not be every time, but there will be at least 1 or 2 deals which you will be able to snag this way. IMO it only takes a handful of great deals over an investment lifetime to make the huge difference come retirement.

6. Being a better negotiator. There are some good, practical RE books in negotiation strategy and tactics which definitely can make a difference. At the very least, save you thousands or 10s of thousands of dollars. Another slight edge over others if you are able to get the deal at a lower price and or with better terms than others. Paying less for an asset and reducing your overall risk has many positive flow on effect ,ie, yield, valuation, possible equity built in, less chance of negative equity.

7. Mindset development: Imho this is probably the most important. If you get this wrong, you will be out of the game or not achieving optimal results and lose any possible edge over others. I won't bother commenting more on this. Any one interested can read 'seasons of life' by Jim rohn.


But does all this mean you really are getting an edge in real estate? Mathematically, I really don't know. Would be interesting to see a mathematical model. But what I do know for certain is that the investors who generally perform the best with real estate and are able to outperform returns of others employ some or all of the above, in some way or another, some to a lesser and others to a greater extent.

Long story short (well not so short after all) this is how I believe people who want to be active investors and try and get an edge in this game and outperform in this asset class could go about it. Its just what has worked for me over the years. A lot of work? Absolutely. But I believe its worth it for the potential results.


Apologies for such as long post. If anyone found any part of it useful then great.

 

This is a very insightful and helpful post. Thankyou for sharing.

 

Very very comprehensive post, love it! For beginner (like me), this is a good guideline

Thanks for sharing!

 

Good post. My feeling is that it is actually a lot easier to get an edge in the real estate market than in shares.

Equities market is domimated by large corporate investors. You have investment funds with dedicated teams of people researching specific companies and sectors 12+hrs a day, hedge funds and day traders with half a dozen monitors and live data, algorithms and bots designed by Harvard mathematics PhDs, HFT computers located within the ASX data room with fat fibre-optic cables running straight to the ASX servers front running incoming trades.

95%+ of property transactions in Australia are made by people emotionally buying their PPOR or a single residential IP with a very simplistic strategies. If you are willing to put in a bit of effort I absolutely agree with you that it is possible to gain an advantage.

 

From everything I've read and my understanding of it, I have come to that conclusion too mate. You read all the greats like Buffett, Dalio, Ichan, Lynch etc, basically they advocate for most people to just put their money into low cost broad tracking funds and hold for the very long term and not try to outperform the market by themselves.

I find that with real estate, or rather what makes up RE markets, it's a lot 'easier' in many ways to find loopholes, information that the broader market don't have yet, etc to be able to get some kind of edge, especially if you are very committed to it. There are all sorts of ways get access to information, deals etc before the entire market has equal access. Also, you are able to influence how quick or slow that deal goes to the entire market buy negotiating with the REA or going straight to the seller etc. There are ways. This is impossible in the stockmarket, at least it is for mere mortals like ourselves.

 

Information Asymmetry in the Real Estate Market

 

Great article! Best article I read in a while . Thanks for sharing. This sums it up perfectly.

"The real estate market has one of the most opaque information systems. Relevant information is not publically disbursed through official sources. Rather, it spreads via grapevine. Therefore, one needs to be well connected to obtain such information and benefit from it. ."

 

Unlike the stock market, real estate is an imperfect market, not all information is available to all players equally. Information on the last sale is anecdotal until settlement usually 6 weeks after the transactions and then some until publication.

No two parcels of land are identical unlike shares, comparative sales are similar and require analysis.

The asset can be changed both by the government or by others eg rezoning, density controls, infrastructure, rebuilding, renovations, extensions, densification, subdivision etc - you can't so that to shares.

 

I'd be interested to see the long version!

cheers,
Inertia.

 

i'll add another one too.

in simple forms. the land/property cant scale like shares do.. companies can grow(depending on entry point, even amazon share price increase 85% a this year) at mega size that no single property/land can, especially when u consider their starting point.

but also in simple forms.

property easier to leverage.
you can have $50k deposit to buy $500k property. (property loans are probably the cheapest loan you gonna get)

unless you have access to margin/investment loan (which is high interest rate compared to property. & shorter term) pretty hard to do so in the stock market.

and when u sell.. your gains are off the 500k price rather than 50k for property.
(also in countries like australia you have tax benefit like our favourite topic,) NEGATIVE GEARING

 

The downside is the same - $50k deposit on $500k property (+ legals & stamps) = say $520k. 10% fall in the market, sell for $450k (- legals - commission to agent etc) = $438k, there goes your $50k and some.

 

if only australian public think like this,, we wont be in this current situation

 

Would put too many to sleep...zzzzzz

 

Wonderful write-up! Thanks @Leo2413