Normally, eliminating your downside risk usually translates into very low returns in the low single digits. I’m going to show you how we developed our program to take advantage of what we call “Excess Returns” in the real estate market.
“Excess Returns” are what is known in investing terms as an Alpha. In this case, an Alpha is defined as being the spread between your upside return on an investment compared to the expected downside risk for that return. That spread is then usually benchmarked against other similar investments to compare the amount of potential risk to potential return. The wider you can manage that spread, the better. In other words, the highest amount of return with the lowest amount of risk.
A while back, the great oracle of Omaha, Warren Buffett, said in his letter to shareholders, “Housing will come back – you can be sure of that.” Then he went to exclaim on CNBC Squawk Box, “I would buy a couple hundred thousand homes, if I could.”
What Mr. Buffett recognizes are these inefficiencies. He knows the spread between the return and risk, or the alpha, is leaning heavily on the “investment scale,” in the Investor’s favor right now. Anytime you can find an investment that has a large alpha, which creates excess returns, you are able to get a far superior return for a minimal amount of risk. This is how investors get rich.
A quick example is a Certificate of Deposit (CD) in a bank. While CDs are usually extremely safe with almost no downside risk to speak of (other than inflation), the return on investment is miniscule: Very low single digit returns, sometimes even less than 1%, depending on the fiscal policies of the Feds at the time.
Great! It is a safe investment, but you’ll get almost no return on your money and literally, if inflation is greater than the return you are receiving on that bank CD, then your money is losing buying power daily. It would then be a Certificate of Disappointment (CD).
What would happen if you could take that same extremely low chance of downsize risk and give it a return of 6%, 8%, or even in the double digits? Then, my friend, you would have what is known as excess return: Your spread being greater between the return on your investment and your downside risk.
Just make sure the spread is in the right direction, because it can be the opposite and give you more downside risk than appropriate for the return on investment.
Finding excess returns in any kind of investment is the way investors get rich. It is done all day long on Wall Street with people in the know. With our Lease 2 Own program, we can take advantage of the excess return. I discovered and developed it through thousands of hours of tweaking, changing, putting it back together, and it constantly evolving. I worked with real estate agents, attorneys, accountants, buyers, investors, etc. to be able to exploit it and produce consistent double digit returns with a very minimized downsized risk.