Real Estate Investing – Your Biggest Investing Enemy?…..Emotion.

Washington D.C. in the fall

Greetings from Washington, DC.  One of my favorite cities…..if not my favorite city.  I’d have to think about it.

As funny or odd as this may sound, Washington D.C. is a very romantic city.  There are so many positive emotions that bubble up that I think the word “romantic” is fitting.  But…not a place for a honeymoon….but then…what do I know.

Today….We spent a lot of time at the Smithsonian Art Museum.   Just amazing.  I have never been more captivated by art.  Living in New Mexico….the art galleries are endless…from Santa Fe to Taos.  Walking from art gallery to art gallary in New Mexico is great….but nothing like here in D.C.

So…as we made our way through all the exhibits at the Smithsonian….one painting captivated me….Repose by John Singer Sargent.  A girl….lounging on a couch.   You can tell this lady is deep in thought….possibly sad.  I wondered for a long while what was she sad about?…what was she thinking about?  I came up with my on conclusion….but I digress.

Repose by John Singer Sargent

Anyway….

Getting caught up in all the amazing emotions touring D.C. reminded me of how dangerous emotions really are.  We all are familiar with emotions when it comes to relationships.  The old saying “love is blind” is a great example.  Well…guess what, emotions are dangerous in business as well.

I remember as a “newbie” investor how wrapped up I would get in a deal…..to the point where blindness would set in.  Getting emotional over a deal is a great way to cloud your vision. All of a sudden you are compromising….or worse….justifying.

Think of it in terms of personal relationship.  Before you start dating someone, you have criteria….then all of a sudden you fall in love and the criteria goes out the window…all in the name of “love.”  All of a sudden the things that you would not compromise on become “cute” or “no big deal.”

Well…in a personal relationship….the relationship ends in heartbreak.  But in business….the results could be financially devastating.

So….

Here are a few ways to avoid getting emotionally involved in a real estate deal.

1)  “Fall in love with the numbers first.” This is probably the most crucial tip. Focus on the numbers first!  Knowing how to analyze a deal and understanding the numbers is crucial.  Letting the numbers dictate your next action is a great rule of thumb.

2) Use the facts. Real numbers should be your focus.  Proforma numbers are “hopeful” numbers.  Never use proforma numbers in your initial analysis.  Yes…proforma numbers have their place in the big picture of things….but not when you are trying to understand the asset.  Proforma numbers only help you fall in love with the property…which is a bad move.  By the way…come up with your own proforma numbers.  Never…ever…ever use a real esate agents or seller’s proforma numbers.

3) Try not to visit the property until you have fallen in love with the numbers.  You may be tempted to go visit the property….but…this may only impact you emotionally.

4) Have someone else look at the numbers too! Having a third party look at the financials will give you a different perspective as well as help you stay focused on the numbers.

5) Write down your investing criteria and stick to it.  In other words, write your plan…work your plan!

Of course…there is a lot more to this but the tips above should give you good start in the right direction.

Until next time…..rob

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