If I had a way of buying a couple hundred thousand single-family homes and had a way of managing … I would load up on them and I would take mortgages out at very, very low rates.
It sucks to be a billionaire. Do you know how hard it is for Warren Buffett to find a nice return on investment at this point?
His company is worth $350 billion dollars, and if his goal is a 10% return per year, he is trying to make $35 billion a year. Where the heck is he going to be able to do that?
Even purchasing entire billion dollar companies isn’t going to make much impact. A billion dollar company might have $100 million in earnings a year. So he would have to acquire 350 companies that size to get $35 billion in earnings.
Smaller deals for companies in the $100 million range are inconsequential for the overall return of his portfolio. Even if they return 25% or 50% a year, they aren’t worth the time.
So even though Buffett sees a good deal in single family homes, he would have to purchase a couple hundred thousand for it to be worth his effort.
You Have an Advantage Over Warren Buffett
Did you ever think you’d actually be in a better position than the legendary investor Warren Buffett?
If you are investing $20 thousand, $100 thousand, or even a million dollars, you have way more options. You don’t have to compete with the huge Berkshire Hathaways, hedge funds, pension funds, or university endowment funds. You can do the smaller deals that take too much effort for the big guys to consider.
Your effort is your advantage. It is a worthwhile use of your time to seek out a $20 thousand dollar investment that has a projected return of 25% per year.
But most people don’t look for opportunities to use this advantage.
Real Estate is Unique
Efficient markets require commodities. Meaning one unit is equal to all of the others.
A share of stock is exactly the same as any other. You can buy one not caring whether you get share number one or one million. If each one were different, how would you be able to quickly know the price?
A barrel of oil is a commodity as well. There is an agreed upon standard, and as long as a barrel meets it, each barrel is considered equal.
Real estate is a lot messier. There are hundreds of unique markets spread across the United States. Different neighborhoods and sub-divisions within those markets. Different housing types like 3 bed, 2 bath or 4 bed, 2 bath. They were built at different times and rehabbed at different times.
When you want to sell a house it is first appraised by an expert. Then it is compared to the most similar nearby homes that recently sold. Only then do you know of what is actually worth.
What a pain! It is an inefficient market with imperfect information, significant transaction costs, and slow transaction speed.
Luckily that pain creates an opportunity for the little guy. If you can navigate the hassle, you will be rewarded.
Note: One of the primary causes of the 2008 financial crash was because banks tried to treat mortgages as commodities. They claiming thousands and even millions of mortgages were all equal based on some shady rating agencies (see the movie The Big Short for an entertaining overview).
Your Effort is Required
There are many ways to do real estate. Which one leverages your advantage?
I have a feeling someone else is doing the work on those and reaping most the rewards that come with it. You need to be the person in charge of the deal, putting in your own effort, and ending up with the property in your name (or an LLC or other entity you own).
This takes effort. Most people aren’t willing or able. It’s too messy for the big fish. That leaves a perfect opportunity for you.
Put in the effort and get the rewards.
What’s holding your back? What are your other unique advantages?