Sometimes You Need to Forget Your Instincts by Ken McElroy

Sometimes You Need to Forget Your Instincts

Gut Feelings Can End Up as Disasters

Too often I hear people say they bought a property because, “It just felt right.”

Although I agree that it’s important to listen to your instincts, there needs to be an understanding that you can listen but are not forced to act. We are not born knowing all things. It takes years of experience to build a good knowledge base for your instincts to draw on.

So, when I hear about someone who has never invested before in their life, and they claim to have had an instinct on a deal, I cringe. Not that I don’t have faith in people, but it’s not that simple.

Decisions based on instinct and no research is exactly what gets people into trouble financially. My advice is to be extremely analytical for the first 20+ years of your investing career and THEN you can start making gut decisions.

It’s important to have the basics down. Get to know your markets and target areas. Your goal is to see the trends and be able to pick out a profitable deal. Then your goal shifts to finding and keeping good residents to keep that cash flow coming in. Once you have that baseline, the rest should come naturally.

I have years of experience under my belt, but I still analyze and don’t rely on my instincts 100%. I still do my online research, on-site visits and several meetings to discuss the pros/cons of the deal until I feel confident about the investment.

When you know a market inside and out, it gives you the vital information to determine a sound investment. The first place I start is the supply and demand of an area.

When we talk about supply and demand of the real estate market, I define it as the number of rental properties available. To work in my favor, the supply of rental properties should be low and the demand for rental properties should be high. The more people who are willing to rent, the better.

When you go to evaluate the supply of a market, I turn to brokers and property managers for the data. They usually have a good collection of property data, including the names, sizes, addresses, and dates of construction.

When looking at the demand of the market, I try to estimate based on the occupancy rates in an area. If you are noticing that there is a high occupancy in an area, that usually means the demand is high. If you see a lot of move-in specials and discounts, that usually indicates that occupancy is low, and the demand is low.

Not only is the current market a factor but so is the future market. Start researching and thinking about all the new rental properties that are in various stages of development. This is a critical indicator of how properties in the area will perform long term. If, through your research, you find that supply is greater than demand, you may want to stay away or at least keep looking for a better market.

Here in Arizona, rental properties, including large apartment communities, and uncountable numbers of duplexes, condos, and single-family homes seem to be everywhere. Many were purchased by hopeful investors but are now competing to obtain a small number of renters. Again, this is why I stress the importance of researching the market and using your experiences (not your gut) to make the best investment choice.

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