I’ve talked about the importance of understanding the numbers as the key step in avoiding the dreaded real estate burnout. If you know what you’re getting into then you’ll do a much better job of balancing the stress (and rewards) or real estate investing.
So not only do you keep your momentum going as an investor, but you also will have some realistic expectations with regards to rate of return, cashflow, and net present value.
But – as in all things in life – moderation is the key. More isn’t always better.
So how to strike the right balance? Well that depends on your background, personality, temperament, and a number of other factors. Me: I’m an engineer at heart (and by training so I love to tinker. So if you’re like me there’s an important key principle to remember: don’t get paralyzed by the analysis.
Ok…fair enough. But what now? Well here are five tips to remember when it comes to running the numbers:
- Don’t forget: your analysis is based on your assumptions. Unless you’re a fortune teller you’re not going to get it perfect. Remember, your goal isn’t to pinpoint the investment’s rate of return to umpteen decimal places. It’s simply to ensure that you have a realistic, profitable, attainable base case. Don’t spend too much time fine tuning.
- The process is as important as the end result: Running the numbers forces you to articulate your assumptions and think about best- and worst- case scenarios. The end result of your analysis will be useful, but the very process of thinking through the pros and cons as important. It’s just good investing discipline.
- Don’t forget the sensitivities: Don’t just consider the final “answer” – consider the sensitivities to evaluate how much risk you’re taking. Ok, you’re forecasting a 4% appreciation rate...but what if it’s 1%? Or 9%?
- Get real: Be honest with yourself. There are two groups of investors that you don’t want to fall into: – the overly conservative one that eliminates every deal, and the overly optimistic one that fiddles the assumptions until they get the result they want. Neither a Nervous Nellie nor a Pollyanna be!
- Remember: once you’ve made your bed you’re going to have to lie in it. Once you pull the trigger you’ll be vulnerable to big events. Neighborhood revitalization: hooray. Mold infestation: uh oh. Keep your hands on the wheel and manage the uncertainties that come along. If you run your analysis consistently and honestly (and learn from your mistakes) then over the long run you’ll stay pointed in the right direction.
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