You’ve taken all this time, spreadsheeted the heck out of your deal, you’ve discovered the magical NOI, cash-on-cash return, and cash flow. But one of the numbers is a little low. This concerns you. What if the deal fails because of this number? Maybe you made a mistake. Now you are back digging numbers in the ‘sheet and trying to find a way to make it work. Amazingly, the numbers work out to all your criteria, but now you have second thoughts. Did you fudge a number just to make it work? You know you shouldn’t do that. Is your desire for the deal so great that it is clouding your judgement? Not good either. You resolve to evaluate a few other deals to see if they are better, promising yourself you’ll come back to it. But you never do.
If you find yourself in this position, you are not alone in your analysis paralysis. Like many of us, you find comfort in the hard mathematical facts. These are the numbers and they can’t be wrong, only you can be. That mentality can cause you to second-guess yourself and never make the commitment to do the deal.
Maybe you are an investor right now. Chances are, you got into this business as an accidental landlord, like me. That first deal that fell on you wasn’t something you were looking for, and maybe it wasn’t even welcome, but you didn’t do much analysis on the deal. It was easy in that respect. Perhaps you are wondering why all the subsequent deals aren’t that easy.
Real estate is a relationship business. Making deals is a negotiating business. Like the professional poker player, the investor doesn’t try to apply science to each decision – they rely on gut. Sure, there are mathematical probabilities about what card the other players are holding, and the pro uses them. But they don’t base their entire judgment on those numbers. It’s the same way in real estate. Here are the steps to avoid Analysis Paralysis:
Rules for Avoiding Analysis Paralysis
- Don’t rely on the numbers as gospel fact. This is the #1 mistake people with Analysis Paralysis make. Numbers are numbers, but in this business they come from estimations and predictions. The equations are scientific but the numbers aren’t. They can’t be when they are based on prior values and future assumptions.
- Remember that no ‘rule’ exists on an island. They are all small pieces of a puzzle, like evidence a physician uses to build a diagnosis – some things support it and some don’t. They don’t all have to work out to make the diagnosis or for the deal to be a good one. The true practitioner of an art is able to put it all together to build a mental picture of the truth about it. They use that truth to make a judgement – a diagnosis or a purchase – it’s all the same.
- Avoid the trap of too much education. Look – I’m a big fan of education. If you can pay someone to teach you and this helps you avoid all the pain they went through, then it probably is worth it. That might be a guru program, coaching, or the purchase of a book. Maybe it’s just reading on the internet. The problem is that there is no limit to knowledge. You will never learn it all and new ideas are being produced every day. Here’s my rule of thumb – educate yourself for 1 hour every day for a year when starting out. That’s 365 hours and is your limit. After this time you should have the knowledge to do your first deal. By limit, I don’t mean stop learning, just that you don’t need to learn more to do that first deal.
- Consider how bad failure actually is. What’s the worst-case scenario for your deal? It’s unlikely that a terrorist will blow up your new investment house and insurance won’t cover it and it’s a total loss. More likely is that your rent doesn’t cover your expenses and you have a modest loss each month and realize you need to sell. Maybe you even sell for a loss. All-told you are out a few thousand dollars and have a great education. If you think a terrorist attack is likely – no problem – they have insurance for that.
- Stop giving Authority to others. If you constantly worry about what others will think about your investing – stop. Know that I have the same problem. What if my deal fails? I’m usually not worried about the financial loss – I’ve planned well enough for that. I’m worried about the embarrassment. I give Authority to others to judge me. At least, I used to. I don’t do that anymore. My book on this will be published this month. It’s called Your Authority Problem and will be on Amazon by Feb 1.
I realize following these 5 rules is easier said than done. It’ll take a lot of work to change your mindset on these. Get started today and soon you’ll be able to conquer your Analysis Paralysis.