“Nothing will ever be attempted if all possible objections must first be overcome.” - Samuel Johnson
What is Analysis Paralysis?
Analysis paralysis is basically when we get so wrapped up in solving a problem that we never take action. Unfortunately, this is something that all too often afflicts aspiring real estate investors.
This starts innocently enough. We get excited about real estate investing and throw ourselves into learning everything we can about. But thousands of hours of podcasts, hundreds of YouTube videos, and multiple books later, we’re still not quite ready to pull the trigger.
It is certainly true you should educate yourself before committing time, money, or resources to any endeavor. Still, we often forget that the best learning comes from doing, and sometimes the best lessons are learned from mistakes. Also, you’re not actually an investor until you do a deal.
I think this was made starkly apparent to me when I went to one of my first real estate investment (REI) meet-ups, which was after I had my first investment property. As part of the introductions, the organizer asked, “How many of you have at least one investment property?” I was stunned at how few hands went up.
That was an experience that repeated itself at every event I went to, whether it was a local REI meet up or a big apartment investing convention. Some people knew nothing about the topic, some had studied it extensively, but most had never taken the actions required to close a deal.
Despite only having done one deal time at the time, it was shockingly clear I was already ahead of my peers. The question is, “Why?”.
Why We Get Stuck in Analysis Paralysis
Indecisiveness - Someone knows they want to invest in real estate but can’t decide what asset class, region, or class of building they want to invest in. They may have “shiny object syndrome” where every new thing sounds better than the last.
The best solution for this is to narrow your options. Ask yourself some of these critical questions.
· What is my risk tolerance level?
· What are my investing goals?
· What do I find most interesting?
· How much time, money, and talent do I have?
By answering these questions and comparing your investor profile with the different options, you should be able to narrow down to what is the best option for your specific situation and preferences.
“The Perfectionist” – I have an involuntary eye-roll every time someone tells me they are a perfectionist. It comes off as a humble brag to most, but to me sounds more like an excuse for not being able to complete things or complete them in any reasonable time. Think of the difference between being “detail-oriented” or being a “perfectionist.” One is an asset; the other is a liability.
This can often manifest itself in someone saying, “I just haven’t found the right deal.” You certainly do have to look at a lot of deals to find one worth investing in. This is especially true if you will be using other people’s money.
Even if you haven’t found that perfect deal, it is no excuse for not taking at least incremental actions. Sometimes our brains need to be eased into situations.
If you don’t know how to swim, no one expects you to jump into the deep end. You need to build your confidence through small accomplishments. Start in the shallow end learning to kick your legs, practice the stroke while someone holds you up, then before you know it; you’re confident enough to go in the deep end yourself!
Investing in real estate is no different. Analyze a few deals to build your confidence up with the numbers aspect. Then pick one of those deals (even if it’s not perfect) and contact the broker or seller to set up a walkthrough. Many of the introverts among us find the simple act of talking to a broker or seller intimidating. If that’s the case for you, remind yourself this is a practice run, and don’t worry about saying all the right things. Then go out and tour the property.
By taking these steps, will you not only build up your confidence but also learn a lot along the way. Now you’ve effectively done many of the first steps for closing a deal and will be better prepared to pull the trigger once you find a deal worth doing.
If you are at the point where you feel comfortable taking action but still feel like you can't find a deal that pencils out, then here's a tip... Find a new market.
Fear is likely the root cause of one’s inability to take action, assuming they have the resources to do so. I would argue this falls into two categories;
· Fear of specific risks
· Fear of failure more broadly
There are a million potential risks and outcomes, and we can scare ourselves out of taking action at any point in the deal process. “What if the broker doesn’t take me seriously? What if they don’t accept my offer? What if the bank won’t lend to me?”
While these might all be legitimate considerations, they are not legitimate excuses not to try.
In the Army, we have a pretty efficient way of dealing with risk. We fill out a risk matrix, which lists all the significant steps involved in the action and assigns it a level of risk (low, moderate, high). Anything assessed as LOW risk is not worth worrying about. With those actions that are deemed MODERATE or HIGH risk, we determine what can be done to mitigate that risk down. At the end of the exercise, if something is still MODERATE, then you should proceed with caution; if it’s HIGH, you may want to rethink that one.
A quick example might be, Joe has $100k to invest and wants to do his first multifamily deal. He found a property where the numbers seem to work, but it would take a significant amount of rehab. He’s calculated his all-in cost between down payment and rehab to be $85k.
Joe is an avid reader of my blog and takes my advice to do a risk matrix and assesses his risk for using all of his own money on this deal as HIGH. After all, he is inexperienced, and his rehab estimates may be off, and he doesn’t have a lot of wiggle room in his budget.
Joe thinks he can mitigate this risk by seeing if his friend Bob would like to joint venture on the project. Not only will this reduce the capital he needs to bring to the table, but Bob was done several flips and has much better insight into the costs and timelines associated with the rehab work. Joe now reassesses the risk level as LOW and is confident moving forward.
The beauty of this approach is that it takes emotions out of the equation. The fears are reduced to facts and actions.
While there are many reasons why someone may become bogged down in analysis to the point where they are unable to take action, I think it’s pretty clear that results from a lack of upfront planning simple fear.
In these instances, we need to outsmart our natural tendencies. That might be by slimming down the options available in the case of indecisiveness or, in the case of risk, rationally assessing and then mitigating the risks involved. By taking these steps, we remove excuses from our path, and the only option is action.
There’s plenty more to come in future posts, so make sure you click here to subscribe. I’ll let you know when new posts are out and provide valuable “pro-tips” associated with that week’s topic.