Prologue to Quantum Analysis of Real Estate Investment

Roller Coaster
Photo by Ken Ratcliff on Flickr.com, CC BY 2.0 – modified

The Prologue contains initial information about Quantum Analysis of real estate investment (REI). It will help you choose between Classical Analysis and Quantum Analysis.

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Difficulty: medium. 14 min read.

Table of Contents

Definition

Classical (traditional) and quantum analyses of investment properties use the same KPI (key performance indicator) - ROI, NOI, ,... These analyses differ only in the way the indicators are presented. Each KPI indicator is represented:

  • By one value in the classic analysis
  • By all possible values, which are presented in the quantum analysis plot.

The quantum plot shows which values of the indicator have a high chance of appearing in the future, and which have a lower chance of appearing in the future. A typical plot, for example, annualized ROI (Return on investment) looks like this:

Typical plot of REI Quantum Analysis

Notes to the plot:

  1. There is no markup on the vertical chance axis, because the absolute values of the chances do not matter. For Quantum Analysis it is enough to see the difference in chances at different values of the indicator.
  2. Quantum analysis includes classical analysis. The red dash marks the median. It corresponds to the ROI value of the indicator in the classical analysis.

In practice quantum plots can take even more characteristic forms. A variety of quantum plots allow to diagnose each indicator in depth.

Demo

Let's explore a few variations on how Quantum Analysis presents an annualized Return on Investment (ROI) indicator. The greater this indicator, the better the property is for investment.

"How To Calculate The ROI On A Property Investment" on Forbes.com:

A good ROI for a rental property is usually above 10%, but 5% to 10% is also an acceptable range.

Suppose an investor is willing to buy a property with an ROI of at least 10%. Our demo data set contains 7 properties from different locations in the investor's city. The classical analysis indicates an annualized ROI of 10% for each property.

Click to expand each example:

“Unfriendly spread out”

Quantum Analysis representation:

“Unfriendly spread out” Quantum Plot

(As a reminder, the red line indicates the median, which corresponds to the value of the classic ROI.)

Quantum Explanation: Half of the time the ROI will be less than 10% and will be much lower. In the other half of the cases the ROI will be only slightly higher than 10%, so you shouldn't expect a big gain.

Quantum Advice: This property is not recommended to the investor. The chances of losing and winning are the same. But the loss is big and the gain is small.

“Friendly spread out”
“Friendly spread out” Quantum Plot

Quantum Explanation: Half of the time the ROI is much more than 10%. In the other half of the cases, ROI is less than 10%, but by a non-critical 1-2%.

Quantum Advice: “Friendly spread out” is a great option even for a beginner investor. The chances of losing and winning are the same. But winning can be very big. A loss, even if it happens, will be small. 

“Roulette”
“Roulette” Quantum Plot

Quantum Explanation: “Roulette”. Half the time you can win big, the other half you can lose big.

Quantum Advice: This property is not recommended for first-time investors who want a reliable, good return on their first investment. Experienced investors with a lot of doors can risk taking this kind of property if other KPI indicators are good.

 “Stability”
“Stability” Quantum Analysis

Quantum Explanation: “Stability”. This form of the plot happens when real estate in the neighborhood has a typical construction:

Standard Building
Photo by Artistic Operations on Pixabay.com, Copyright-free

Quantum Advice: The stability of ROI means that if it will be different from 10%, then only a little.

“Candle”:
“Stability” Quantum Plot

Quantum Explanation: “Candle”. The vertical line means only one possible value of ROI. This is what the indicator looks like, which the analyst calculated in the classic style of analysis.

Quantum Advice: Ask your analyst to recalculate the ROI using Quantum Analysis. It's important for you to see the shape of the ROI bell to see the chances of all the values and compare them to each other.

“Break”
“Break” Quantum Plot

Quantum Explanation: “Break”. Possible ROI values in Quantum Analysis usually have a smooth line that descends to zero left and right. A break in the quantum plot on one or both sides at once is a sign of a failure of the quantum analysis program.

Quantum Advice: Return the analysis to the analyst and ask him to rebuild it. Most likely, he has recently fine-tuned the calculation program and now it isn't working correctly.

“Bimodality”
“Bimodality” Quantum Plot

Quantum Explanation: Two bells usually indicate bimodality (double-peak) of the raw data. For example, the analysis was done on the property, which is near the ocean:

First Line Houses on Coastal Areas
Photo by Joaquin Aranoa on Pixabay.com, Copyright-free

First-line homes look out over the ocean. Second-line homes look at first-line homes. The values and rents of first- and second-line homes will be radically different. Quantum analysis reflects this in the form of 2 bells on the ROI plot.

Quantum Advice: You need to clarify which modality (“peak”) the property belongs to. Ask the analyst to repeat the analysis, but only consider homes on the same line as the property being analyzed. Then there is only one “bell” on the ROI chart to which the property will belong.

In all 7 cases, the classical analysis indicates the same 10% annualized ROI, while Quantum Analysis details 7 different situations and gives 7 different tips.

There are many more than 7 characteristic forms of quantum plots. Quantum plots make dozens of diagnoses for each KPI indicator.

Niels Bohr, a founding father of Quantum Theory, received a Nobel Prize in Physics for his work on quanta. He said in June 1952:

Niels Bohr' Quote
Photo by Wikipedia.org, Copyright-free – modified

Pros

All the enthusiasm for Quantum Analysis comes from investors who use it. To name three major excitements.

Pro #1. Correspondence principle

Wikipedia.org:

Correspondence principle: A new theory should reproduce under some conditions the results of older well-established theories in those domains where the old theories work.

Quantum analysis of REI carefully preserves all the KPIs of classical analysis. Investors continue to use in Quantum Analysis all the experience they have gained from using classical analyses.

The explanation of ROI quantum plots took 5 minutes. Explanation of the quantum plots is the same for different KPI indicators.

If investors can easily read the results of the REI classical analysis, they can read results of the REI Quantum Analysis with even greater ease. 

Pro #2. Information Value

Characteristic forms of quantum plots distinguish dozens of diagnoses about each indicator. The information value of Quantum Analysis allows:

  • Finding great real estate where classical analysis doubts the suitability of real estate
  • Rejecting bad real estate, which classical analysis recognizes as suitable
  • Detecting of incorrectly made analyses.

Pro #3. Evidence-based

Investors don't trust classical analyses of other investors. Experienced investors are advised to ignore the classic analysis from sellers:

Andrew Syrios Quote
Photo on DataDrivenInvestor.com – modified

But quantum analysis plots include every conceivable and inconceivable optimistic and conservative option,... and even indicates their chances relative to each other. That's why Quantum Analysis is accepted by all real estate investors. Each of them finds a suitable value on quantum plots, according to their degree of conservatism of the buyer or optimism of the seller:

Two zones are a conservatism and an optimism

Evidence-based Quantum Analysis makes it the gold standard among real estate investors.

If Quantum Analysis follows an investment property, the buyer will no longer ask his analyst to do a classical analysis. The buyer can:

  • Decide in 2-3 minutes if he has an interest in buying
  • Detect incorrect analysis
  • Even quietly delegate the decision to his acquisition management.

Evidence-based Quantum Analysis is especially valuable in situations where money is made fast - wholesale, filtering lists (heirs, real estate with fresh encumbrances,...)

Also evidence-based Quantum Analysis allows the use of Machine Learning (ML). Then the program will be able to independently cut off 95-97% of real estate in which the KPI does not fit this buyer.

Cons

To the extent that Quantum Analysis is easy and intuitive to use, it's just as difficult to prepare:

Types of Headaches
The silhouette by Guksir on SketchFab.com, Copyright-free  – modified

Quantum analysis is at the crossing point of Maths, programming and computers. These disciplines are the main difficulty in preparing REI Quantum Analysis.

Con #1. Maths

Formulas of REI classical analysis are very simple. Each formula consists of 2-3 variables that are related by the actions of arithmetic - add, subtract, multiply, and divide. Elementary school knowledge is enough to develop a classical analysis of real estate investment.

Experienced investors adore to explain classic analysis of REI on a napkin for beginners:

REI Classical Analysis on a Napkin
Video by Coach Carson on Youtube.com

The Math of Quantum Analysis is studied during the final years of Math and Physics faculties. The formulas are complicated and there are many of them. The end of the lecture on the uncertainty principle of Quantum Mechanics looks like this:

A Board With Quantum Formulas
Image via “A Serious Man” movie on Tagi.tv

Each next lecture is a jungle of new formulas. They make studying quantum theory a madhouse.

Scott Aaronson
Scott Aaronson

American quantum computing scientist Scott Aaronson writes in his book “Quantum Computing Since Democritus”:

Look, if you teach an introductory course on quantum mechanics, and the students don't have nightmares for weeks, tear their hair out, wander around with bloodshot eyes, ets., then you probably didn't get the point accross.

But learning does not mean understanding. Quantum theory is too mad. Quantum physicists admit that few of them understand quantum theory.

Con #2. Programming

REI classic analysis is mostly programmed through spreadsheets, sometimes through popular programming languages like PHP or Python.

Quantum analysis is developed using programming languages for mathematical calculations. In such languages, it is possible to write mathematical formulas in a style familiar to mathematicians. They have by design:

  • Rational numbers, imaginary numbers, matrices, sets, and other mathematical structures
  • Multiply/summarize matrices, differentiate/integrate,... with a single line.

But most popular mathematical programming languages (MATLAB, GNU Octave, Scilab, R,...) are too slow. Quantum analysis requires mathematical programming languages that have the features to speed up quantum calculations:

  • Compiling code
  • Paralleling calculations on processor cores
  • Distribution of calculations among many computers.

Con #3. Computer

Your smartphone smoothly displays FullHD video. It's 2 million pixels that refresh 30 times per second. Your smartphone easily shoots 1 million classic REI analyses every second.

Quantum analysis of a single property requires billions of times more computation than is needed for classical analysis. The duration of quantum calculations of a single real estate depends on the type of computer and takes:

  • Months on a smartphone
  • Weeks on a laptop
  • Days on a desktop
  • Hours on a server with thousands of processor cores that cost over $10,000
  • Minutes on a supercomputer that cost over $1 million
  • Seconds on a quantum computer that cost over $10 million:
IBM Quantum Computer
Quantum computer photo by IBM Research on Flickr.com is licensed under CC BY-ND 2.0

FAQ

The prologue is coming to an end. It's a good time to answer frequent questions.

Q1: Is REI classical analysis dead now?

Classical and quantum analyses live peacefully, each is good in its own niche.

Classical analysis is useful in cases where its inaccuracies aren't important, but its speed and simplicity are in demand. These are training courses for novice investors, draft analyses, preparation of “pro forma” offers from wholesalers/syndicators,...

Quantum analysis of REI is in great demand when investing $100,000 or more. If an investor is looking to buy real estate or wants to reorganize their portfolio, he would probably prefer to make a decision based on REI Quantum Analysis.

Q2: Is Quantum Analysis a marketing name?

I agree, these days the word Quantum is attached to anything. Quantum cocktail:

Quantum Cocktail
Photo by Crazy Gnome on Youtube

But in science, the word Quantum denotes theories related by a general quantum concept:

  • Quantum mechanics
  • Quantum field theory
  • Quantum optics
  • Quantum algebra
  • Quantum logic
  • Quantum groups
  • etc.

The name “Quantum Analysis” reflects the fact that Quantum Analysis uses the conceptual apparatus and mathematical methods of quantum theory.

Q3. How long did it take you to write the Prologue?

It took 105 hours to create the Prologue, of which:

  • 19 hours to write
  • 31 hours to prepare photos and plots
  • 43 hours to video shooting and editing
  • 12 hours to publish the Prologue.
Q4: How do I add my question here?

Ask me your question in the contact form or send me a personal message in BiggerPockets.

Red Pill and Blue Pill

The video (2.5 minutes) is inspired by the movie Matrix:

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