How Seasoned Real Estate Investors Avoid Risk Analysis Paralysis
Every investor will feel the very real symptoms of analysis paralysis in their investing career. It’s common for beginner investors to be so caught up in numbers and risks and deals that it costs them the investment altogether. But seasoned investors aren’t immune to occasional hesitation when it comes to investing decisions. So how do you know when you’ve done enough research to pull the trigger? How do you know when to say yes, when to say no, and when to say “not now”? Having a deeper understanding of why analysis paralysis happens and how to work through it can help every investor weigh risks and rewards. In our recent podcast about knowing when to analyze and when to act, we discussed a few of the biggest factors that investors should consider (but not obsess over) to avoid analysis paralysis.
One of the biggest issues that hang up new investors is the price. Paying too much for the property is a common mistake that we’ve all made. Jumping into an investment without comparing it to other properties in the area can put investors in a rough start before they even get started. Making risky decisions like overpaying for a property is almost the opposite of analysis paralysis. While waiting around too long for the perfect deal can cost you, so can jumping in too soon.
If your investment strategy is to buy and hold, it’s important to focus on the “hold.” Buying a property and selling it within a year makes it hard to turn a significant profit. Before you invest, consider if you’re in this for the long-term. Are you going to have the time/energy/desire/ability to manage this property as a long-term commitment to see an increased ROI?
Part of an in-depth analysis of the cost of an investment is understanding how taxes factor into your final cost. Before you make any decisions, find out what the tax regulations are in the area. Cities with high property taxes can make it difficult to make a profit on investment properties. If you are serious about investing in an area that typically has higher taxes, it’s important to factor that into your budget so you can make a profit and give Uncle Sam his cut.
Hiring a professional property management company can save investors valuable time and effort by making sure the day-to-day task associated with the property are taken care of. If you are like many beginning investors, you are dabbling in the real estate investment world while still working full time and managing life and family responsibilities. A property manager can help you manage the rent, maintenance issues, taxes and other issues so you can focus on living life and enjoy the passive income your property generates. Many investors fall in love with turnkey real estate for just this reason. Turnkey real estate allows investors to show up, purchase a home and wait for the rent checks to come rolling in. The property acquisition, tenant screening, and other time-consuming tasks are taken care of. If your analysis paralysis comes from not knowing if you have the time or knowledge to manage a property that’ll generate the highest ROI, hire a property a management company and check that worry off of your list. And if/when you do hire a property manager, make sure they have the six vital characteristics of a successful property management team to ensure your investing success.
Another important thing to consider when deciding on an investment property is how much work it needs. Finding a great deal is one thing, but not if it means spending your entire budget making it a safe and livable space. And the initial upgrades and repairs aren’t the only thing you should think about. Set aside 5% of your rental income for the inevitable repairs that the property will need. Take time to analyze the property. If you need to, have a professional give you a break down of what the house needs now and the major repairs that you can expect to see in the foreseeable future.
Don’t let a few upgrades and repairs steer you away from a good deal, but also don’t jump into something that is a black hole of DIY, repairs, and rehab.
No tenants mean no rent checks in your mailbox. Vacancy rates can be stressful and costly, so it’s essential to have a plan for when it happens. Every investor will find himself or herself in a situation where the property is empty unexpectedly, and being prepared for this financially is the best way to stay afloat. If you are a new investor and are concerned about vacancy rates, stick with single-family properties. Higher occupancy units like duplexes and apartments could have 3-4 vacancies all at once, which could be a significant blow if you’re not ready for it. There a few ways to avoid vacancies and shorten the amount of time your home (and mailbox) are empty
- Consider decreasing the price
- Offer extra incentives
- Consider short-term leasing
- Reduce the costs while the home is empty
Some investors get so caught up in finding the perfect property that they overlook properties that have the potential to be perfect. If you’re only looking at A and B class properties, you may be missing out on excellent C class properties that just need a little TLC. Seasoned investors know the secret is investing in C class properties, fixing it up to attract high-quality tenants, and having a property manager oversee it. Many cases of analysis paralysis happen when investors choose not to be flexible in their requirements. Instead of waiting for the perfect property to come along, look at a wide variety of property classes and look past what it is and focus on what it can be. While a “C” in high school means you’re barely scraping by, a C class property in real estate can be extremely profitable if you have the right tools in place.
Another mistake many investors make that cause them to lose out on great deals is not physically checking out the property and neighborhood for themselves. A quick online search of an area can give you a broad idea of the status of the neighborhood, crime rates, unemployment rates, school ratings, and demographics. But until you actually get in the car and take a ride through for yourself, you never really know. Using a map or online search is a great search tool and a great place to start, but shouldn’t be the extent of your research. If you’ve found a great property, but the neighborhood looks sketchy online, don’t wait around for red areas to turn to green on a virtual map. Instead, make multiple visits at different times of the day and during the week to get a realistic idea of what the neighborhood is like.
Different cities have different laws when it comes to landlord/tenant roles and responsibilities. Make sure you’re aware of these laws of the area before you invest there. This is especially important when considering a long distance investment. More important than reading the laws and understanding the statues is talking to local property owners. They can give you a clear idea of the laws and ordinances that you should be aware of. This can be a time-consuming process, but it’s important to avoid surprises once you own the property.
The idea when it comes to smart investing and in-depth analysis is to take as long as you have to but no longer than you need to. In real estate, time is money, and the longer you wait for the stars to align and everything to be perfect, the higher the risk is losing out on the deal altogether.
As you build your portfolio, you will perfect this fine line of analysis and paralysis through trial and error. You’ll jump on deals too soon, and you’ll miss deals because you waited too long. It’s all part of the process. However, knowing the main factors that trip investors up and being proactive in those areas can save you time, money and heartbreak in the long run.