{"id":74153,"date":"2020-01-15T09:00:30","date_gmt":"2020-01-15T16:00:30","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=74153"},"modified":"2021-03-16T11:42:00","modified_gmt":"2021-03-16T17:42:00","slug":"2015-07-28-metrics-lead-to-bad-investments","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2015-07-28-metrics-lead-to-bad-investments","title":{"rendered":"Blinded by Numbers: How Fixating on Metrics Can Lead to Bad Investments"},"content":{"rendered":"

\u201c[N]ot everything that can be counted counts, and not everything that counts can be counted.\u201d<\/em>
\n\u2014William Bruce Cameron<\/p><\/blockquote>\n

I was talking to a group of real estate investors at an investor meetup. A few of them purchased buy and hold<\/a> properties in the middle of the Great Recession<\/a>. They focused on the numbers and closed a buy and hold deal with a potential 25 percent cash-on-cash return.<\/p>\n

Things were going well for a time, but as soon as the market recovered, vacancies began to rise.<\/p>\n

Related:<\/strong> How to Calculate Cash-on-Cash Return<\/a><\/em><\/p>\n

Why did the vacancies increase?<\/p>\n

The tenants lived there due to the recession. As soon as their incomes rose, they left ASAP. As a result, the investors dealt with frequent tenant churn, theft, and vacancies. Over time, the properties turned into huge liabilities.<\/p>\n

The investors had a golden opportunity to purchase quality properties at a discount, but instead they picked losers. How did this happen?<\/p>\n

More than likely, they were relying too heavily on metrics.<\/p>\n

\"financials,<\/p>\n

Why Do We Overemphasize Metrics?<\/h2>\n

Occasionally I watch the show “American Greed.” I cringe when I see these con men prey on poor investors.<\/p>\n

I thought it was the hucksters\u2019 way with words and charm that allowed them to steal people\u2019s money. But actually, that wasn\u2019t it. The cons told the investors what they wanted to hear: \u201cYou can make a quick buck by investing in X.\u201d<\/p>\n

The lure of a fat return\u00a0quenches our collective thirst for money<\/a>.<\/p>\n

It happens to most of us. We see a property and think to ourselves, \u201cYes, it\u2019s in a shady neighborhood; yes, it was constructed in 1910; and yes, it looks like crap. But look at the 15 percent cash-on-cash\u00a0return<\/a>.\u201d<\/p>\n

So, we pull the trigger and then decide which Caribbean Island we will retire on.<\/p>\n

Sadly, that\u2019s where most real estate investors fail. They focus only on the numbers and neglect the factors that drive the numbers<\/a>, which results in the utter failure of their investment.<\/p>\n

How Can Metrics Hurt Our Investments?<\/h2>\n

Donald T. Campbell created numerous works in the field of social science and psychology. Unfortunately, most of his work isn\u2019t known in the investment community, so I took one of his laws and put an investor\u2019s spin on it.<\/p>\n

A Campbell-Inspired Real Estate Law:<\/strong><\/p>\n

\u201cIf real estate investment metrics (e.g. return on investment, cash-on-cash return, etc.) are used as the primary reason for investment decisions, odds are the investment will fail.\u201d<\/em><\/p><\/blockquote>\n

Numbers are important, but they’re not as important as the investment vehicle generating them.<\/p>\n

Metrics are tools. Similar to a compass, they can point you north; however, they won\u2019t warn you about the canyon ahead.<\/p>\n

Post-purchase, if we continue to heavily focus only on the numbers, we will make poor decisions in the short term that can potentially cause long-term losses and more substantial costs.<\/p>\n

If we make decisions solely on metrics\u2014such as pushing off a major structural repair or cutting corners with cheap, shoddy work in order to keep our numbers in line with our projections\u2014eventually we will decrease the value of the asset and reduce its ability to generate cash flow.<\/p>\n

\"neighborhood,<\/p>\n

How to Pull Yourself Out of the Metrics Trap<\/h2>\n

Investors should instead focus on three factors that lend themselves to a healthy real estate investment.<\/p>\n

Neighborhood<\/h3>\n

Consider the following when sizing up a neighborhood:<\/p>\n