Real Estate Investing is an Art, Not a Science

While coaching a client this morning, about analyzing a Duplex property in Utah, we entered into an area that gets little attention or space in the forums. That Real Estate Investing (REI) is an art, not a science. There is so much focus on crunching the numbers and all the financing math and economic formulas and principles that it is easy for anyone to form the belief that REI can be done, mechanically, with the precision of a 3D printer robot. Nope. Not the case as anyone who has been in the biz for long knows all too well.

Sometimes it is an easy decision

At the margins, it is easier to make mechanical, robotic types of business decisions about prospective deals. If they are grossly overpriced or underperforming, it is a no-brainer. Even an idiot could say NO with confidence. Or if a deal is at the other end of the extreme, say, literally and clearly priced at HALF what it is worth, also easy to say YES without much further hand-wringing over it. But, those types probably represent less than 10% of all the deals we might actually find and be willing to buy. It is this other 90% where it gets hard-er. Not having the luxury of a clear-cut Go/NO-Go direction, we dig in and try to arrive at a decision the hard way. Analysis. Research and market inspection, etc. Usually, we end up with a less than confident result and outcome, a not-so-clear "decision" indicator. And at that point, the hand-wringing begins. We backtrack and check all of our numbers and data, check our pro-forma expense assumptions, rethink where we might be light on the income side or high on the expenses, all in an effort to see if we can somehow justify going thru with the deal.

Usually, it is a Difficult decision

Now, this is where the ART aspect comes into play, the raw numbers and data having "failed" us, not making it an easy decision for us. Wahhhh. Nobody said REI is easy! Or maybe a lot of "Gurus" do, but don't get us started on that subject.

At this point, the typical situation for the vast majority of potential deals ever analyzed, paralysis can easily set in. Absent the "easy" decision now, what is an investor to do? Pass? Play? Fret? Punt?

Here is a discussion of this situation, approximately as with my client coachee this morning. I was opining after we had discussed his analysis of the Duplex property and was coming out with a breakeven (BE) cash flow (CF) and wondered what he should do.

Here is how I handle the Difficult decisions

I would take each deal, on a case by case basis, including taking your own individual personal goals and situation into account. Sometimes, often, I will be "flexible" within a range, on my analysis, depending on how much I like or want the property. This is where the art side trumps the science side of this business. I often fudge on my own numbers, lowering the maintenance, or Capex or even vacancy allowance if everything else about the deal looks great to me and if I am hungry for a property at the time. See what I am saying? I might pass on a deal today, that I would jump at 6 months from now, or vice versa, based on my backlog of projects or being lazy or greedy or whatever, regardless of the merits of the market or actual property or deal.

But I will NOT go too far ignoring my discipline of the 40% expenses. Not like using 3% instead of 10% each or saying Zero cost for management since I am personally managing it, or no vacancy since it is so...pretty;). Easy to delude oneself and get into a bad deal.

Like each Property, each Investor is also Unique

My personal financial situation, stage of my life, attitude, energy, schedule, druthers, etc., may permit me to be a lot sloppier than you could/should be. I can absorb and afford a lot of bad surprises and financial shocks outside of my typical proforma analysis guidelines. I have hundreds of thousands of dollars to swing over to cover a bad experience or bad run of luck or unusually bad string of vacancies or untimely clog of big-ticket roofs needed all at once, etc. So that makes me a little bolder and more willing to fudge a little on my numbers and maybe buy a deal I otherwise shouldn't have, had I strictly adhered to the typical rigid analysis. I have made $Millions doing just this because they usually work out fine, and the perfect storm never occurred. Good judgment? Gambling? Reckless? or...Genius? Who knows. Being overly inflexible to the point of stupid with analysis can hurt you for sure, by making your quest to buy properties almost impossible. As a legally trained individual, we were taught in law school to be able to make a strong argument (case) for BOTH and EITHER side of the aisle. We can all use numbers, assumptions, rules, and analysis to rule in, or rule out, ANY property at all. But that should not be done to the extreme of forcing us on the sidelines when we should have bought the deal. How does one know when and how to reconcile all of these conflicting, competing goals and indications? Should we pass or jump on it? Is the risk of maybe paying a little too much worth the risk of maybe losing a lot over time, or not?

Experience is the Final Ingredient in Analysis

My answer and the point of this article is this. It is this type of situation, the hazy, blurry, unclear and messy decision areas with which EXPERIENCE alone can serve you. And if you don't have that requisite experience, it is a good idea to seek and obtain it from a mentor or a coach. Even if you pay for that service. Why not? It could save or make you 100 times the cost, or more. And you will learn in the process as well as playing it safe. One way or the other, you will pay for the experience, yours or someone else's.