Magical real estate riches

A lot of people and a lot of books claim that you can make a killing in real estate.  In my jaded, cynical opinion, a lot of this information is more hype than substance.

People who simply talk about making a killing in real estate

…yet they haven’t actually made a killing in real estate.

People who seem to make a killing in real estate

Real estate can be highly leveraged because investors can take out large mortgages on their properties.  This magnifies their gains and it also magnifies their losses.  In a real estate boom, their gains are spectacular.  And in real estate busts, their losses are also spectacular.  Donald Trump almost went bankrupt.  And he is one of the survivors.

If you do something where you have a small chance of going to 0, you will eventually lose all your money.  This is also known as Gambler’s Ruin.

If somebody is doing real well in real estate, they might simply be crazy.

People who actually make a killing at real estate

Middlemen.  There are various real estate agents and brokers in the industry.  These people typically take on very little risk (they are not leveraged) and collect fees.  The distribution of talent and money is very uneven.  A small minority of people make almost all the money.  (To be fair, these people do add value to society because no real estate would be sold without them.  I don’t mean to disparage them when I say middlemen.  Also, you could be in the small minority of people who are really good at it.)

Really smart developers.  Real estate development is the riskiest part of real estate and also potentially the most profitable.  Often the development company owns land, which can drop 90% in price (this happened when the US real estate bubble burst).  The wiser, not-so-crazy developers like NVR will instead own land options.  They have a right but not an obligation to buy a piece of developed land.  When the US real estate bubble burst, the landowner was stuck with the suddenly not-so-valuable land.  I would also point out that NVR emerged from the ashes of bankruptcy protection as its predecessor company took on too much risk and had to enter bankruptcy protection.  They learned their lesson.

Other than the two examples above, I don’t know of people who make a killing in real estate without taking on crazy risks.  With low leverage and risk, real estate is otherwise a place where investors can make reasonable but not insane returns.

Buying condos pre-construction

There is risk from land price fluctuations and from construction risks (e.g. it make take a few years for the developer to sell all the units in the condo).  I don’t know of people who have been able to consistently make money in this fashion.  Usually some retail “investors” make money, think that they are genius, imitators flood the market, the bubble bursts, and a lot of people lose their deposits (and maybe more…).  This has happened many times in places around the world.

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