I’ve stated in previous posts and articles that running the numbers and making sound assumptions about your potential investments is one of the keys to avoiding real estate investor burnout.  Real estate is a long term game and you can’t build a stable portfolio overnight.  This means you need some staying power, so if you end up packing it in after your first investment or two you’ll never get there.  

So in my view looking before you leap is the best way to keep your momentum as an investor, and that means having an idea about what to expect from an investment in terms of rate of return, cashflow and net present value.  

But analysis is like aspirin, or fine wine, or just about anything, for that matter.  A bit of it can make a big difference – but that doesn’t mean that a massive dose is a good idea.  More isn’t necessarily better.  

How do you strike the right balance?  Well that depends on the investor.  Personally, I’m an engineer by training and I love numbers; that’s why I ended up building this site.  I see the value in using a tool to catch all of those assumptions wrapping them into a cashflow projection.  Plus, I love to tinker.  But therein lies two danger – 1) becoming infatuated with the analysis and forgetting about the underlying uncertainties (no analysis is perfect) and 2) becoming infatuated with perfecting the analysis to the extent that you never get a deal done.  In other words: don't get paralyzed.

Both of these problems happen...probably more than you’d think.  

So...how to avoid these issues?  Again, it depends on the investor and your personality type, but I’d suggest the following rules of thumb: 

• Remember: your analysis is based on your assumptions.  Unless you have a working crystal ball you’re never going to get it all right.  Your analysis will give you your base case.  When you get your results ask yourself “is this target a good result?  Does the potential reward justify the risks?”  if the answer is “yes” then drive on and figure out how to make the deal work – don’t spend time fine tuning.  
• Analysis is a process:  I worked for a while in strategic planning with a major corporation.  We spit out huge, detailed plans.  And we never followed them.  Is this a bad result?  Well, not necessarily – the planning process itself is hugely valuable.  It forces executives to examine their assumptions, communicate their goals, and crystallize their thinking.  The planning process helps organizations to articulate their vision and set their course, even if they don’t follow the resulting plans to the letter.  Real estate analysis is similar: running the numbers will force you to consider the big questions around vacancies, rental rates, repairs, and other risks that you might not consider before jumping into the investment.  
• Evaluate the sensitivities:  Don’t just look at the final “answer” – look at the sensitivities to understand how much risk you’re taking.  Ok, you’re forecasting a 5% appreciation rate...but what if it’s 3%?  Or 8%?  The EquityScout tornado diagrams will help you do this, but if you’re running spreadsheets you can do the same thing manually.  
• Be honest with yourself:  There are two camps that you want to stay out of – the overly conservative camp that kills every deal that comes along by handicapping them with excess costs, and the rose-colored-glasses camp that tweaks all the variables up until they get the result they want.  Nervous Nellies do no deals, and the Pollyannas do bad ones.  
• Remember: once you’ve made your bed you’re going to have to lie in it.  A single fortuitous event (a upgrade in the neighborhood) or misfortune (a mold infestation or a disastrous tenant) will radically impact the performance of your investment.  You’re still going to have a lot of uncertainty to manage once you make your investment; the purpose of the analysis is simply to ensure you’re pointed in the right direction before you pull the trigger.