5 Steps To Overcoming Analysis Paralysis
Several things may hold someone back from investing in real estate, including inadequate capital, knowledge gaps, and inaccessibility to quality investments. The number one reason, however, is uncertainty.
Uncertainty can be the kryptonite to confidence, and it is the biggest deal killer of all. This isn’t always a bad thing. Many investors have said, “Sometimes the best investments are the ones you don’t make.”
The desire for certainty is driven by wanting to feel that the investment is safe, that we won’t lose money, and that it is sound enough to deliver on the promise it is making.
“Analysis Paralysis” exists when the uncertainty of potential outcomes causes us to freeze and take no action at all.
We all know that every investment has some risk and that there is usually a relationship between the risk and the potential return. Analysis Paralysis can be a detriment when it prevents us from moving forward with decisions that will move us toward what we want.
I have personally “missed out” on some excellent investment opportunities due to analysis paralysis. I started learning about multifamily investments in 2018 but didn’t invest in my first apartment deal until 2021. Given the market these past few years, there are many, many deals I could have invested in earlier that have already exited ahead of schedule and significantly out-performed projections. Uncertainty held me back, but I just wasn’t ready. I needed more education, stronger relationships, and hands-on experience before I felt ready, and that’s OK.
I bring all this up because strong investment opportunities fill up quickly. If you are at a place where you feel ready to invest, then you need a process to assess and decide quickly when an opportunity comes your way; otherwise, you will be left on the sidelines.
Here is a 5-step process that I hope will help you reach that yes or no quickly and confidently.
Step 1- Re-establish Goals and Criteria
This one step alone will help to save time and energy. We are all familiar with “shiny object syndrome,” where something interesting catches our attention, and we start pursuing it without taking time to assess its real value and alignment with what we are looking for.
When we are clear on our goals and the criteria for investments that meet them, we can quickly run any opportunity through this one filter and then decide if it is worth more review.
Maybe your goal is to accelerate the growth of your capital, and your highest priority is investing in assets that you believe will appreciate quickly and steeply based on market appreciation and opportunity for value creation. Suppose that’s your goal, and you are presented with an opportunity to invest in property with a planned 10-year hold in the Midwest with a consistent 8% cash on cash return. In that case, you can quickly move on because while that may be a great opportunity, it doesn’t align with your goals and criteria.
Step 2- Assess the Downside: Can You Live With It?
It is unlikely we would hold back from investing because we believed the upside was too strong, but, understandably, we would be held back by a healthy fear of the downside.
We are looking for asymmetric returns where the upside potential is greater than the downside risk, but there is still a downside risk, and we need to be able to live with that.
When evaluating an opportunity, ask yourself these three questions:
What’s the worst-case scenario with this investment?
What evidence demonstrates the protection against that downside, making it highly unlikely?
Even if it is highly unlikely, should the worst-case scenario occur, could I live with that?
Going through those 3 will give you a clear understanding of your confidence in the downside protection AND your comfortability with it. If you can live with the worst-case scenario, move on to step 3.
Step 3- Evaluate the Upside
Once you have gotten clear on the downside and you are STILL interested, now evaluate the upside. Ask yourself these three questions:
What’s the potential upside here?
What evidence demonstrates this upside is possible, and how likely is it?
Does the potential and likelihood of the upside outweigh the potential downside?
If you believe the upside potential is likely based on the information you have and that it is strong enough to outweigh the potential downside, then keep moving through the process.
Step 4- Assess the Need and/or Availability of More Information
Sometimes on the TV show “Shark Tank,” the entrepreneur receives an offer from a shark, and they say, “Either take my offer or don’t, but you need to tell me now before hearing any other offers.”
Some circumstances require us to make a decision with only 70% of the information we would like to have, but it is important to recognize whether you are dealing with one of those decisions.
If you have gone through steps 1 through 3 and you are still interested but feel you need more information to make a responsible decision, ask these three questions:
What are the 1-3 key pieces of information I absolutely need before making a final decision?
Who or what resource do I have available that can provide that information?
Is that information available to me in the timeline I need to make this decision?
Sometimes it may be a follow-up conversation with the investment sponsor. Maybe it is getting the opinion of another expert you respect. The important thing is that you are clear on exactly what you need to know, and you have a next step on how to get that information.
Step 5- Decide and Move On
One of my favorite books, “Think and Grow Rich,” says that successful people develop the habit of making decisions promptly and changing decisions slowly.
Once a decision is made, move on. Questioning a decision that has already been made is like chasing after a train that has already left the station; you end up exhausted and nowhere closer to your destination.
When we follow the 4 steps preceding this one, we should be able to move on with confidence knowing we made the best possible decision based on the information available to us at that time, and that is the best we can do!
Conclusion
Even in the face of uncertainty, effective decision-making is one of the most valuable skills we can develop. One of my favorite quotes from Tony Robbins is, “It is in our moments of decision that our destiny is shaped.” Decisions are necessary to move towards what we want and to help us steer away from what we don’t.
Analysis Paralysis is common, and it makes sense because we want to do the right thing but rarely do we truly know the long-term impact of the investment decisions we make today; it is only after the fact that we look back and assess the quality of our judgment. That’s both frightening and liberating. The best we can do is follow a logical process with a dash of gut instinct and enjoy the journey.