degree of control in a situation.
2)
My definition of risk assesses your emotions and how you feel about your level of control.
Notice that I eliminate “probability” or “chance” from my definition of risk. In my world, actions and options are more important than probability. No matter how bad a scenario gets, there are always actions to be performed and options that can be explored. Probability and chance come from past data, and may or may not apply to the present or the future.
Naturally, there are things that can happen outside of my control, and I must address and mitigate all contingencies before proceeding. Should something outside of my control become an issue, the question is: how do we recover from this position? In my world, I understand that in life and in business, plans fail, people fail, systems fail, and markets fail. And what is more important than relying on all these imperfect elements is to understand how to recover and “fix” the failures. I build failure and multiple contingency plans into my ventures and understand that failure and recovery are part of the game.
In real estate, between 5 percent and 10 percent on the balance sheet of a buy and hold will be factored in for vacancy on multifamily buildings. On a buy, fix, and sell, at least 3 percent will be factored in as a “sales discount,” meaning we cannot plan on selling at full price. Restaurants and traditional businesses will build theft into their balance sheets. Sophisticated business people understand that failure, loss, and recovery are all part of the game and factor it in to their projections and balance sheets in advance.
My definition understands that there are elements in our control and out of our control. There is no luck—only degrees of control. If you are OK with your degree of control, then proceed with the risk. Of course, there is always that moment where we must take a “leap of faith,” and no amount of due diligence can protect us from the elements out of our control.
What is most important when entering an endeavor with risk is to ask yourself, How do I escape if I want to exit? For myself, one of the reasons I love real estate is that no matter how bad the deal goes, there is always
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a large tangible asset attached to the venture that can be liquidated to recover the investor’s capital.
Again, we come back to elements under control and elements out of control. When raising capital from an investor or considering a “risky” venture, take them through the following scenarios to asses if the venture is right for them: the best case, the realistic case, the worst case, and the nightmare case.
As for myself, I have a low risk tolerance, and I always say to my capital partners, “If you are OK with the nightmare scenario, then we are OK to do business.”
At the end of the day, risk is all about emotions. If we are emotionally OK with our degree of control and how the nightmare scenario would affect our life, then we are ready for the risk. If you cannot handle the elements that are out of control and would not be able to live with the nightmare scenario, then the risk is not for you. There is a famous saying “Nothing ventured, nothing gained,” and we must all take calculated risks in our pursuit of success. The question is, after exploring a few definitions of risk, How do you personally define risk going forward?
Your personal definition of risk is extremely important because it will define which risks to take and which ones to avoid. To paraphrase Sun Tzu, know yourself and know your enemy, and you will be victorious in every battle.
Action Step: Write down three elements that you must be in control of when investing in a real estate deal. Also write down three elements you are comfortable leaving outside of your control.
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Chapter 6
Insider Trading and
Why You Need to Do It
I
n stocks, insider trading is illegal. In real estate, insider trading is es-sential.
In any market, there are insiders and there are outsiders. When corporate executives on Wall Street buy or sell stocks in their own companies with “insider knowledge,” they go to jail. When a real estate investor gets first chance to purchase a property privately without public knowledge, he can get rich.
Markets like Wall Street are set up like casinos, and TV stations like Canada’s BNN (Business News Network) are funded by stockbrokers to create excitement and encourage trading. Stockbrokers get paid when trades happen, so they want their audience on BNN to get emotional and make as many trades as possible. BNN will run stories that pump up the emotions of the audience just to make money; the information is not provided to make actual sound investment decisions.
When emotions go up, intelligence goes down; in a casino, the house always wins. And when it comes to stocks, you are not the house.
In my opinion, the stock market is not designed for the average investor
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to win. Rather, it’s a game played by insiders and institutional investors. For the average retail investor, there is very little control in stocks—unless you’re an insider.
I prefer to control my investments, control the management, and control the outcome of my returns. I also prefer to make purchases as an insider with access to the necessary information to make profitable decisions.
Information is king in the market, and those who control the information control the market.
In real estate you become an insider by
1) Belonging to a large network of other investors
2) Maintaining a large network of lawyers
3) Posting private advertisements for deals
4) Offering referral programs
5) Working with a large network of Realtors®
6) Speaking in front of groups of investors or the public
7) Creating content, blogs, and videos for consumption
8) Working with a network of property managers
9) Working with a network of private lenders
10) Becoming the biggest, most visible person in the market
The truth is that becoming an insider is quite simple in real estate. The best deals always come to those who are 1) most visible, 2) most connected, and, 3) most in control of the information in the market.
When a real estate deal hits the local market with a Realtor®, the deal has already been cherry-picked by at least eight sets of eyes. The fewer sets of eyeballs that see the deal before hitting the market, the higher
