Make better decisions!
It has finally dawned on me at the ripe age of forty one. I have indeed discovered the meaning of life. In real estate, business, and even romantic partnerships. Wait for it. Wait for it. Make better decisions.
It can't really be that simple can it? I will assert that it is. What separates Warren Buffett from 99.99 percent of all other investors? Making better decisions! In fact, when we study success it always comes down to superior judgment in the respective field of endeavor. Understand, its not just the logic of Mr. Spock I am talking about either. It also includes the squishy term called intuition. Inductive logic AND deductive logic.
So the question I seek to answer: how do I make better decisions as a real estate investor?
A decision model ( see Quantitative Analysis for Management, Render and Stair Fifth Edition at pg 138) can aid in adding structure to our thought process. While the model is intended to apply hard core statistics even a basic non statistics based application of the model appears useful.
Clearly define the problem at hand.
So, for a new investor perhaps the question is: I want to invest in real estate what is the best strategy for a new investor? Where an experienced investor may ask: I am ready to branch out which strategy should I branch into?
This step allows us to really get specific about the constraints we face and starts the wheels turning on ways to overcome the hurdles.
List the possible alternatives.
This step is where we get to go into the universe of vehicles available for
example a new investor may chose among:
Buy and hold with 100% Seller financing
Wholesaling commercial/residential
Master lease option (commercial)/Sandwich option
Fix and Flip with hard money/private money
Identify the possible outcomes.
This step forces us to really try to pin down likely outcomes of a course of action. For example if we are evaluate the above options we would attempt to identify the range of payoffs.
List the payoffs from each of the alternatives.
On this step we evaluate the relative risk and reward of the projects/strategies we are selecting to pursue. For example wholesaling involves low capital investment and less risk while 100% seller financing when capital expenditures are taking in consideration appears to be a significantly
riskier prospect.
Select a model to evaluate the alternatives.
Apply the model and execute
The final two steps involve an understanding of the type of information available to make the decision.
Is the decision under certainty, under risk, or under uncertainty? Under certainty we are simply making a math based decision: which will yield more: a time deposit that yields .5% return or a US treasury investment that will yield 1%. Under risk we can calculate the probabilities of a given outcome: if we roll the dice we have a 1/6 chance of guessing correctly. Under uncertainty we have to make educated guesses about the likely outcome.
This is also the time we evaluate how we wish to proceed? Are we a risk taker in search of the highest possible rewards? We may be more prone to select 100% financing as a strategy. However, if we are more risk adverse we would likely select wholesaling as the likely core strategy
In conclusion, using the steps laid out about will help aid in making better decisions. It will help narrow down choices as an antidote analysis paralysis. Finally we can take massive action comfortable that we have made a wise choice that will result in increased prosperity.
For a excellent treatment of this topic with rigorous examples I recommend this link:
About the author:
Douglas Dowell, Jd. is a real estate investor with a focus on multifamily investment syndication and venture capital.
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