Should Not be Emotional

This is a business. This needs to be a profitable business. If the emotions prevent us as entrepreneurs and business owners to make logical and data-driven decisions, then we must find a way to reduce, if not, remove completely emotions from our decision making.

Imagine, you connect with a distressed homeowner. This homeowner is under water and owes more money on their mortgage than the actual home is worth. Because of this distress, your emotions take over and you end up wanting to help. You decide the best way to help is to purchase the property over asking price to help relieve the debt of the seller. You did this without conducting a proper cash flow analysis and now you’re in a worse financial position. 

As you read this, I’m sure you may think to yourself, there is no way I would do that!

Let’s offer a different example!

You’ve been searching for and analyzing deals all day for weeks! You finally find a deal that might work. The numbers make sense through the 70% rule, they meet your initial buying criteria in the first phase of due diligence – your initial screening. You visit the property with a home inspector and add up the rehab amount from your experience and conversations with your family and friends. 

Then it starts. The numbers are a little too close. You begin shaving the numbers! “This deal is so great! I think I can keep the rehab to a minimum…” Or, “I can lower my vacancy and repairs expense.” Or worse, “My rental will definitely reach the high end of Rental Income”

Why do emotions happen?

We get excited! I completely understand and have lived through it!

Once a potential property emerges from our automatic MLS Searches, or a local wholesaler or investor, we think, “This is it!” We remember why we started and know that one of the ways to achieve our goals and financial independence has large in part to do with how many rental properties we acquire.

It has happened many times where we look at the rehab budget and the estimated repairs will absolutely in fact end up costing more than the rehab budget. Sometimes, even when your Real Estate Agent and/or Home Inspector attempts to tell you to walk away from the deal, there is hesitation.

Why emotions are so dangerous! Why it is important not to get emotional when investing

There happens to be a Fear of Missing out (FOMO).

You begin to think, this is the deal! I have been searching and searching and I may not find another deal like it. “This must be the best deal out there that I have a chance to get!”

This mindset leads to:

Over Paying or Winning a Bidding War

“Highest and Best” are the scariest words for a newbie Buyer. You thought you submitted your highest and best offer. Then you receive that message from the seller’s agent requesting all buyers to provide their “Highest and Best”. Now all you want to do is negotiate against yourself and submit more than your original highest and best to then create a new highest than best. Dangerous cycle, no?

Becoming emotionally attached

“I love this house!” 

“It’s beautiful”

“I love the cash flow my spreadsheet says”

“I love the Return on Investment my spreadsheet calculated”

“I love the original hardwood!”

At all costs, and while it is difficult to say, we must remain neutral. It is not a matter of the right amount of cash flow, or the right location, or the size or the beauty. As an investor, your role is to find properties that meet all of your criteria. 

The location must work AND the cash flow must work AND the Return on Investment must work, etc..

Rehabbing as if you were going to live in the home

It is difficult to Avoid. Your natural inclination is going to be to think about the materials, finishes, colors and decorations as if you were going to live in the home. 

We must avoid this at all costs! 

You might end up spending way more than you needed to.

As an example, consider your purchasing a  investment property  in a location where in order to reach the highest rental income (calculated through reviewing and comparing all rental comparables)  you find that backsplash is not required, white or black  appliances is perfectly fine and  there is not a square of  ceramic tile on the floors throughout the home. 

This may very well not be the market that you currently live in, or the market you invest in. 

The point is to review what the market is telling you versus your emotions telling you what you think is best for a tenant you do not know

How to avoid emotional investing

Have a Meeting with Yourself

Self Reflection required!

Ask yourself: 

• As specific as possible, who’s time is gone/wasted? Please list all individuals. Realize each team member gets paid when you’re successful!

• As specific as possible, how much money is gone/wasted? With the potential of earning thousands of dollars over the course of this investment, the ROI speaks for itself. Worth it!

Support team

 Do this now! No that you absolutely need a support team. It’s not a question. Get it done now. That’s a point. The support team could very well be family, friends, your property management company company, anyone that you can consider an accountability partner. Provide your concrete criteria to this accountability partner at every deal you need to convince them stem and show them why it makes sense. It needs to meet your concrete criteria. Your support team will help in that!

Concrete Criteria

 Far away from the deal, is the deal, before you even see a property, listing your concrete criteria greets criteria on a piece of paper or online will help you tremendously. This means you have in writing exactly what your minimum criteria is for the purchase of a parental property. 

The goal is to further prevent any emotional response and allow pure logic. It is green light red light. Does this rent property meet your minimum criteria? If so you move forward if not you move away from the deal. The goal is to create a simple yes no scenario scenario to allow you to be able to logically Make the decision. 

Understand Your Comps

Work with a Licensed real estate agent. Have this agent provide you with a Comparable Market Analysis (CMA). Ask questions and truly understand why the comps are what they are. Put on the hat of an appraiser to understand why this individual will select those comps and how the price will be adjusted.

Take your Time

There are millions and millions of homes! Even homes that fall within the state you would like to invest in, there are still Thousands of homes. Better yet, even within each local micro market, there are tons of homes! 

There needs to be that reminder to let you know, it’s okay. Don’t rush, and take your time.