There is no doubt that a unique dance of back and forth thoughts goes on in the minds of every property investor when it comes their decision on whether to proceed with a deal or not.
By virtue of spending a lot of time with fellow property investors, its a common occurrence for Chris and I to have conversations about deal analysis, risks vs rewards and the whole ‘shall I shan’t I’ dilemma.
What’s interesting about these conversations is that as humans we are typically seeking some form of consensus, approval and permission from our peers and mentors before we proceed. However, we must bear in mind that what’s good for one person may not be good for another.
As one becomes more educated in property, we can sometimes feel the desire to be back at the beginning with limited knowledge and a cavalier attitude, because then we would have less holding us back from diving in (I’ve certainly felt that in past years, even though we recognise that’s no way to build a property portfolio). As we increase our knowledge there is the risk of paralysing ourselves with analysis, looking for the elusive risk free deal with a guaranteed high return.
However it really doesn’t have to be that way- we don’t have to have an arduous decision making process. We each need to create a system for decision making so that when opportunities are found or presented, we have the mental capacity to take action on a number of them. With that in place the decision process can be more of an elegant and well practised ‘mental dance’.
This will not always come down to a matter of Return on Investment (ROI), but many other variables that are particular to you, your beliefs, your values, and other factors.
We simply can’t expect any investment to be 100% risk free. The only truly risk free decision is to do nothing at all, but then what’s the opportunity cost of doing nothing? In order to use property as a vehicle to increase income and wealth in assets, you will need to make the decision to proceed with a certain number of deals. To do that you will need to run the decision through your own filter – is the deal good or bad in the context of your life and objectives.
So what might that look like? Here’s one possible approach to help create your decision making filter.
The way we like to talk about it round our Mastermind tables is to start with ‘WHY’. In other words, what is it that we actually want property investing to create for us. This is getting crystal clear on what you are working towards and deciding if the deal moves you closer to that big why or not.
At the next level the prospect deal might be filtered through how closely it aligns with how you are involved, and the possible input required from you. For example, if the nature of the deal will require your input into tasks you enjoy, possibly draw on your existing expert skills, network and knowledge, then you will be more attracted to it. If the nature of the investment requires you to be doing activities that are not in any way aligned with what you want to do or enjoy, then its going to rank lower.
When it comes to the rewards, there is no one size fits all. The level of ROI you are happy with is completely a personal choice. I think so long as you are happy that the investment can conservatively deliver a return better than ‘A another’ investment you have experience in, often that is satisfactory. It will always come down to what you feel is a fair exchange.
When it comes to the risks, it is each investor’s responsibility to carry out sufficient diligence to understand and mitigate the possible downsides. This involves working through all the possible what if’s and marrying up the appropriate exits, business structures and associated financial downsides. The somewhat comforting thing about property is that quite often time can be a great ally to put certain things right. However, whilst some deals will come with large upsides, the downsides may be proportionately too large for the investor to shoulder if the worst case scenario unfolds. This is why it is so helpful to specify a certain risk tolerance as part of your criteria. For example you may be willing to work with (and potentially lose) 10% of your net worth, but you wouldn’t want to put 90% of your net worth on the line.
As you can see there is certainly no one size fits all when it comes to decision making. The purpose of this post is by no means to be prescriptive but rather prompt the conversation for investor’s to have with themselves in order to define their own criteria to arrive at a decision. One thing I do know for sure is that if you are ever feeling too emotionally attached to a deal, there is a risk of compromising on your criteria in order to push it through. The antidote to this is to work harder on your deal flow so you feel OK with turning deals down in favour of the ones that do meet your criteria [I’ve written a separate blog on the importance of deal flow if you’re interested, see link at the bottom].
So in conclusion, I wanted to leave you with 2 fantastic questions that will help you implement a decision making process for yourselves. These were shared by our mentor Paul Smith.
Once all of your number crunching and diligence has been done, you have to decide what is right for you, your goals and your measure of safety. To help, ask yourself these two key questions:
- What’s the best possible outcome for this deal and will it make a difference to my life?
- What’s the worst possible outcome for this deal and will it make a difference to my life?
Here’s to some great deals being done in the final stretch of the year!
Click here to read the post on deal flow