Buyers vs. Investors: How to Distinguish your Portfolio

Hi all, while many of you are familiar with Bill Beck, the main Rise public facing figure and guy behind our incredible social media presence (check out our Instagram @rise_properties for some incredible video tutorials and nuggets of golden knowledge), my name is Pete Terrezza. I’m the one behind the scenes at Rise and specialize in analysis and risk management. I’m passionate about investing across all asset classes, and for our first blog post I wanted to talk a little bit about investing at a general level.

In the two markets I’m most familiar, the stock market and the real estate market, I find that there are a lot of “investors” out there that are simply far too willing to buy assets without understanding the downside risks or qualities that make a “good investment”. The most common phrase I hear for either of these markets is “the market always goes up”. Perhaps if one looks at an investment timeline of infinity this would be true, but just because something will eventually increase in value, that does NOT make it a good investment. We’ve all heard the old adage “past performance is not indicative of future results”, and I think this rings particularly true right now when massive amounts of money around the globe is being printed and society has been forced into advancing much quicker into the digital age as a result of the Coronavirus pandemic. The simple fact of the matter is, just because markets have gone up for the past 5, 10, 15 years does not mean they will do the same in the future. Is society or the economy today the same as what it was 10-20 years ago? It would be futile to begin to list the differences, but the answer is a resounding no.

 Let me quickly caveat everything I’m about to say with this: everyone has different risk parameters, investment timelines, and desired returns, and I am NOT a financial advisor by any means. This is simply my perspective on investing and hope it will be helpful to you all. I’ll stick with real estate for example purposes, but my ideas apply to all asset classes to varying degrees. This article will be primarily focused on longer term investing and will largely ignore “Fix-and-Flip” and shorter term investing strategies. In the future I’ll do a separate post on what makes a successful short term/fix-and-flip investment.

For something to be a “good” investment, it needs to fall into one of two categories: 1) I can purchase the asset at a discount to current market values or 2) I have some sort of insight/edge that tells me that current market values aren’t properly reflective of the future market values. If an investment does NOT fall into one of these two categories, then it is just an average purchase that anyone could have made. Let’s illustrate these concepts with some examples:

Examples of Category 1

  • An average house in town X sells for 100k, but because I know someone personally who is selling, I can purchase the house for 80k.
  • An average house in town X sells for 100k, but because I contacted the Owner at a time in their life when they needed to sell quickly, they were willing to sell for 85k.
  • An average house in town X sells for 100k, but because the previous Owner foreclosed the Bank that owns the property is trying to get the house off their balance sheet and will sell for 90k.

Examples of Category 2

  • An average house in town X sells for 100k, but because I know that a train line to a major city is going to be constructed in the next few years (and most do NOT know this), houses should actually be worth 130k.
  • An average house in town X sells for 100k, but because I know that a University is going to be constructed in the next few years (and most do NOT know this), there is going to be a big influx of housing demand and houses should actually be worth 125k.
  • An average house in town X sells for 100k, but because I know that some major businesses (think Amazon, Apple, or any of the “sexy” businesses of today’s age) are going to put an office in the town, many affluent people will be moving there and the house should really be worth 115k.

All too often, Bill and I speak to investors that simply buy any asset as long as the return is good enough for their parameters. There is nothing inherently wrong with this approach, but for the majority of people out there (Rise included) capital is limited, and if I buy everything that simply meets my return criteria, I’ll quickly run out of capital. Furthermore, it is the “Buyers” (or worse the people that overpay) that are hurt when the market slumps for extended periods of time while the investors do fine because they were able to unlock value through one of the above categories.

I hope the above was helpful, and I encourage you to try and categorize your next potential investment into one of the two above categories. To relate to all the videogame playing youth out there – the best investors use sniper rifles not tommy guns.

-Pete

Share:

More Posts

Want to discuss a deal on your own property?

Contact RISE today and get a deal tomorrow.

Follow RISE Properties

© 2020 All Rights Reserved