Bankroll management strategies are a cornerstone of betting, with all of the most successful gamblers in history having some form of strategy. Whilst such strategies are most commonly associated with the casino or the bookies, they also play a huge role in investment.
Popular bankroll strategies such as the Kelly Criterion may have started off as a wagering system, but have since been used as an investment engine by financial heavyweights such as Warren Buffet and Bill Gross. When it comes to real estate investment, playing the long game – which is what many of these strategies require – is often the surest path to healthy financial returns in the long run.
Let’s take a look at the top bankroll management strategies, and see how they can be applied to the modern world of property investment.
Playing Within Your Bankroll
The first golden rule of bankroll management in games such as poker and blackjack is to always play within a clearly defined bankroll. Successful gamblers are strict at setting aside a certain amount of cash to play with and ensuring they don’t go over it.
For example, they may set aside a $500 bankroll, but this money is completely separate from the money they use to pay for rent, bills, and leisure.
In real estate, this is naturally a sound strategy. First-time investors can be tempted by rock-bottom interest rates on mortgages or easy loans, but this can come at a cost if the investment backfires or doesn’t give the returns promised.
Anyone who is seriously investing in real estate should prepare an investment fund they can afford to lose, so that risk is minimised.
The Kelly Criterion and Level Staking
Simply put, the Kelly Criterion is another way of assessing your buy-in level and building a long-term investment strategy with low amounts of risk involved. Its popularity in poker may seem surprising, given that people tend to think of high risk for huge jackpots, but that’s not how the big league players do things.
The real high rollers all have a strategy and they may often congregate to discuss these kinds of strategies. Successful players play safely, preferring to reap the long-term benefits such as the rewards from VIP casino schemes, which include paid-for vacations and exclusive access to games that allow them to win more money. Bankroll strategies such as the Kelly Criterion are a cornerstone of this high roller gameplan.
Developed by J.L Kelly in 1956, the Criterion is a formula which assesses the optimum size of a stake to ensure maximum returns. It typically takes the implied probability odds of a bet and calculating whether your chances of winning the bet are higher than these odds. If so, you have a value bet.
In real estate investment, this can be a winner for those looking to spread their investments across vehicles such as co-ops and timeshares. You calculate the percentage of funds you’re willing to invest, say 20%, and ensure this percentage stays the same. That way, if your investment loses money, the amount you’re investing shrinks, while it will increase if your investment pays off.
This is similar to another form of bankroll management known as level staking, which states that you bet the same stake (as a percentage of the total) at all times, regardless of how well your investment is performing. Again, this is a way of minimizing risk and loss while guaranteeing that you’ll benefit when your investment pays off. The applicability of this strategy in property investment is obvious.
As you can see, bankroll management strategies are particularly effective in the current real estate market. Returns are unevenly distributed across the sector, with some areas seeing much more volatility than others. Wisely allocating your investments according to these principles will increase your chances of benefitting overall, while reducing your chances of suffering a debilitating loss.