Whether you’re a beginner rehabber or you have several deals under your belt, we all get the same feeling: the anxiety and sensation of urgency to find your next (or first) deal. This is a natural feeling in this super exciting field of residential rehabbing.
If real estate is truly your passion, you’ll spend countless hours daydreaming and fantasizing about the perfect rehab project — getting a lead from your perfectly executed marketing campaign, negotiating the perfect deal from the motivated seller, executing a flawless rehab, and selling for 10% more than your estimated ARV! It all looks so good in our heads, and we can’t wait to get started.
This passion we have for real estate investing drives us to read more books, knock on more doors, call more contractors, and work harder on our rehabs. Passion and excitement for real estate are truly essential attributes for any successful real estate investor.
However, the passion you have for real estate has the risk of acting as a double-edged sword. It’s possible and often likely for your excitement for real estate to drive you into bad deals and undesirable situations. During the hustle and bustle of your life as a real estate investor, it’s essential to trust your business processes to ensure you only buy solid investment deals.
Below are a few essential tips for keeping a level head and reducing the role that emotion plays in choosing your real estate deals.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
3 Tips for Taking the Emotion Out of Buying Rehab Deals
Tip #1: Trust the Numbers
You have an investment analysis tool for a reason. You may be able to run some of the numbers in your head, but you need a structured, formalized process for deal analysis that drives your investment decisions.
Seasoned investors may balk at this notion, citing their years of experience as the reason they do not need to use formal analysis tools. While experience will certainly help you quickly validate deals, you cannot be 100 percent confident in the quality of a deal without running the numbers through a formal tool (especially as a beginner!).
Perhaps just as important as trusting the numbers is not ignoring numbers and attributes that may negatively impact your deal. As discussed in “3 Common Pitfalls to Avoid During your Rehab Projects,” it’s common for investors to ignore undesirable qualitative features of their properties. It is essential that you remain honest with yourself in conducting a comprehensive analysis to account for all variables.
You are only hurting yourself if you avoid negative deal attributes to pad your estimated profit.
Tip #2: Establish Firm Criteria for “Go”/ “No-Go” Areas and Neighborhoods
Every market has areas and neighborhoods that make more and less sense for different types of investing. In addition, every investor has a varying degree of market knowledge when moving throughout different areas of the region. When establishing your rehab strategy, it is essential that you identify the areas and neighborhoods that meet your project criteria. Before looking at any “live” deals, you should know what geographic boundaries will be acceptable when looking into potential projects.
Once you have identified the towns and neighborhoods that meet your investment criteria, assign a strict “no-go” classification to those that do not. This “no-go” classification can be viewed as a “veto power” held by your investment criteria. Even if you run all the numbers and it looks like a good deal, properties with the “n0-go” classification should absolutely not be taken on. It’s essential that you establish this classification up front. This allows for unbiased assignment clear from the influence of the excitement and emotion of a potential deal.
Do not be shy in communicating your “no-go” classification with wholesalers and motivated sellers. Nobody likes when others waste their time. If you are not clear about your geographic criteria with your network of investors and your potential sellers, you stand the risk of wasting their time discussing deals that have no shot of passing your qualification process.
When sharing your criteria, you need not be rude about it. Simply state that your company does not invest in that specific area at this time. If you receive a lead from a motivated seller, you should go above and beyond by simply saying, “No, we don’t invest there.” Offer some resources on the next steps they might take to get their home sold. Better yet, take on the role of a wholesaler and try to connect the seller with another investor who is interested in the subject neighborhood.
In the end, honesty is the best policy. Stay out of areas that do not fit your criteria. Do not let the emotion of an exciting deal break your process.
Tip #3: Don’t Speculate
A combination of the first two tips is to avoid speculating in areas that do not have true historical data to warrant solid investments. Put more simply, rely only on actual figures and stick with your “no-go” criteria until historical data warrants it applicable to consider otherwise.
Every market has those neighborhoods that are “on the verge of turning around.” Maybe it’s a new business, restaurant, park, school or government funded program that leads us to believe we are on the cusp of a boom. It’s very easy to hop on the bandwagon of excitement that is bound to become associated with areas like this. Regardless of how promising these potential turnarounds may be, it’s essential to fall back to your analysis that relies on factual historical information.
But what if I miss out? Perhaps this is the notion that leads you to invest in one of these turnaround areas. To this I say, “So what!” There are plenty of good deals in areas and neighborhoods for which we have strong historical data to support our analysis. There is no reason to risk your investors’ money by plowing into a neighborhood that might take off. It’s true that you might miss the early boat to the promised land. But don’t let your envious feelings get the best of you.
Be confident in analysis process and don’t let the hype shake your level head.
The excitement of engaging in a real estate deal is hard to pass up. I urge you to step back and call upon your patience. The excitement you feel will wear off quickly if you invest in a losing property. It’s far better to wait it out for a deal that fits your criteria. Don’t force it! Deals will come. The excitement of purchasing an exciting process is nothing compared to the jubilation of cashing out on a sound, solid investment!
How do you avoid emotion-driven decisions when it comes to real estate?
Let me know with a comment!