Rules of Thumb and Analysis Paralysis

There are dozens of metrics that you can use to evaluate a potential real estate investment, but too many rules can be a burden and cause "analysis paralysis". Further, not every piece of data can be quantified and there are many subjective factors that must be assessed in order to become a great investor. Despite the dozens of ways to evaluate a real estate investment, the only true way to learn to be a great investor is by doing it.

A couple years ago, I watched the opportunity of a lifetime pass me by all because of some real estate rules of thumb that I read on a blog post. The most beautiful, well-kept triplex in the city was for sale at fair market value. The location was A++ and I remarked to my friends and family that this was the best multi-family location I had ever seen in the city. A triplex close to the river front surrounded by blocks and blocks of single family homes. I knew something was unique about this property but there was a problem, the cash-on-cash return was too low, it only cash flowed $150/month (I demanded at least $300), and it was about 20% shy of the "1% rule". I called the listing agent for more information. Incredibly, there were no offers on the property. I could have had the best triplex in the best location in the city for market value! But analysis paralysis got me, I didn't pull the trigger.
Fast forward two years to now and that triplex is would easily sell for $60,000 more than I could have bought it. Further, rents in the city have jumped exponentially and, at market rent, this triplex could be cash flowing over $700 a month with A++ tenants. My gut was right, this property was unique. This property would be a money maker; maybe it didn't hit all the rules of thumb "now" but the potential was there. This experience made me realize that not everything can be quantified.
Subjective Analysis vs Objective Analysis

“The more you overthink the less you will understand.” -Habeeb Akande

My subjective analysis and experience as a real estate agent and investor told me that this was a great buy; a highly unique product that if purchased and held for a decade or two would make me hundreds-of-thousands of dollars with very little risk, but the objective analysis just didn't hit all my criteria.
I thought to myself "If this was a D class property in a D location but hit the 1% rule and cash flowed $300 a month, should I have bought that instead?" Further I started to question which of the two types of analysis (objective/subjective) is more valuable in the long-run?
Objective analysis is very important. An investor must be able to understand and analyze the current financial status of a potential investment using different metrics; but not enough credit is given to the subjective side of the equation, the data which can't be quantified, the analysis that can only take place in one's mind using one's experience, knowledge, and gut instinct. 

I often watch beginner real estate investors struggle through all of the "real estate rules of thumb" that so easily ensnare them in the trap of analysis paralysis. Rules of thumb are great if you understand their purpose: to quickly understand the current value of a property in relation to the available data and other investment opportunities. But here's the problem with rules of thumb, almost NEVER is all of the data available, and whatever data is available is backward looking. For instance, rules of thumb cannot provide you with the subjective data that is often more important than the objective data. Maybe you are aware of a new Starbucks going in down the block where there is a duplex for sale at market value. This could be a great opportunity to buy a property before the rest of the market realizes what's going on. If, however, you look too closely at rules of thumb and the "number just don't quite work", you may end up missing a great opportunity to buy a slightly under performing multi family property in a gentrifying neighborhood where prices are about to jump along with market rents.

An additional problem is that very rarely will an investment opportunity meet all of the required "rules of thumb", so instead of buying and holding real estate for long periods of time, I watch investors sit on their hands and do nothing until the "perfect" investment comes along all the while prices are rising, rents are rising, neighborhoods are changing, and great opportunities are passing them by. I rarely come across an investment opportunity that meets the 1% rule, meets the cash flow requirements of investors, has a high enough cash-on-cash return, AND is in a great neighborhood! Again, not every data point can be quantified. 

Rules of thumb are there for a reason, and they are not to be entirely discarded. Ultimately, however, one must learn to develop the subjective skills that will allow him/her to see things before everyone else already has.