Excel has bred millions of analysts. After a few false starts it often becomes the generator of all that is TRUTH. Once you become comfortable with your skill level, confidence rises in the various bottom lines created by the equal number of spreadsheets you’ve created. The lifeless, static nature of the spreadsheet is at some point morphed into future projections by the investor. Assumptions are made. Premises are accepted without challenge. Then it happens.
The investor reaches the point at which they’re ready to ‘set the bar’ for whatever it is they’re doing. On BiggerPockets it’d mostly be real estate or notes secured by same. Before long there are several of these bars. These bars are set with assumed premises, many unchallenged/untested. Assumptions that are hopes more than defendable data. But it can be even worse.
The assumptions can be unspoken — between the lines, if you will. These are often unintentional in nature, but can be devastating just the same. The longer period of time a spreadsheet covers, the more likely it is the damage will be substantial. False premises and erroneous assumptions are bad enough in and of themselves. When combined into a lethal cocktail, the hangover can last for years, or worse, cause hard earned investment capital to disappear.
Even solid, reliable data can backfire during careful analysis.
Though I learned the lessons of analysis years ago (and too many the hard way), a few conversations this week have served to underline the wisdom imparted by those lessons. One of those conversations was had online, in the comments after a post I recently wrote here. It had to do with the velocity of paying off loans, and the method used to make early debt retirement a reality. I’d promoted the payoff of one loan at a time, while the writer wondered why it mattered. If the loans were eliminated one at at time or slowly, together, the time it took was identical. In other words, concentrating on one of say, two properties, then the second, didn’t speed anything up whatsoever, all things being equal.
And there’s the rub.
Is that conclusion correct? Will both loans be paid off in the same number of payments whether it’s all at once or one at a time? Again, assuming the same beginning loan amounts, interest rates, and the same amount added monthly by the investor? Yes, almost always the same, sometimes one month’s difference. So then why would anyone pick one over the other? That’d be silly, right? This is where experience shows up at the scene. It reminds us of two facts of analytical life.
1. Analysis will predict the future if all numbers are correct.
2. Even if all numbers in retrospect turned out to be correct (coughBScough), they wouldn’t predict all the outside factors which could or actually do impact the investor’s options during and at the end of the projected holding period. (Ah, projected holding period. My nomination for oxymoronic phrase of the year.)
See, the premise was correct: Whether we spread out the extra payment money evenly each month over both loans, or pay one off first, then the second, it takes the same amount of time. Well, actually, in this case 94 and 95 months respectively. However, the assumption made by the investor, based upon that accurate premise, was false. The assumption being — that either way the loans were eliminated, neither one offered an advantage over the other.
Wrong AnalystBreath. 🙂
If the ‘Domino Strategy’ is employed, the first property is rendered free ‘n clear in 55 months, give or take a hiccup here and there. If in the that 55 months an opportunity arose, allowing the investor to utilize that equity via sale or exchange, that option would actually be on his menu. If he’d opted to spread out the extra payments equally, his option most likely would’ve been limited to using both properties’ equities, or passing on the opportunity. In this scenario that might’ve been pretty disappointing. Here’s how the numbers could’ve worked out.
Even if there was no appreciation, his original 25% equity position has morphed into 100%. Since he chose to execute the BawldGuy Domino Strategy, he takes his one debt free property and exchanges into nearly four times the value. The most attractive consequence of this will be the nearly quadrupling of his retirement income directly traceable to that one property.
Cue the HappyFeet Dance.
BawldGuy TakeAway: All the investor’s analysis showed was that the loans on both properties would be paid in full in the same amount of time, regardless of the strategy he employed. What it didn’t tell him was the horrific opportunity cost he’d of experienced, had he opted for the method used by the vast majority of long term real estate investors. Analysis doesn’t factor in outside economic events — future opportunities — or — the flexibility allowing the investor the ability, choice if you prefer, of modifying his Plan when circumstances allowed.
Though this is but the simplest of examples, there are as many examples as there are strategies. When the experienced investor utilizes multiple strategies applied synergistically, the missed opportunities and bypassed options can boggle the mind. What really grinds, is that the options not created for your own menu become apparent right when they woulda come in handy. I suggest the real lesson to be understood, is that all too often, the analysis itself is almost always camouflaging serious information. An experienced and well trained analyst will not be fooled, but instead sees what the numbers may not clearly spell out on the spreadsheet. In this example, it was the option to nearly quadruple the ultimate retirement income from just one property.
The concept of analysis is spoken of these days as if anyone can do it well, while also extracting the hidden nuggets and future options for which we all search. Experience shows me that simply isn’t true for most. The skill begins with understanding the numbers required in a given analysis. But it brings real gold to the table when it’s executed and translated by a true analyst. The difference in your end game results can be staggeringly positive.