Most people use Excel spreadsheets, financial models, and other quantitative data when making investment decisions. I love all of that stuff and use it too. However, one aspect of investing, particualarly real estate investing that is rarely mentioned is intuition.
It sounds crazy, but I’ve built a million dollar plus net worth relying just as much on intuition as I have on cold, hard data. I think a lot of successful investors leverage intuition but are afraid of sharing that secret for fear of being labled cooky or “woo woo.”
That said, I’m endeavoring to be as honest as possible in this blog, so I’m going to try to explain how I’ve leveraged intuition in my investment decisions in hopes that it will encourage you to hone your own intuition as an additional tool in your investment decision making arsenal.
I’ve always been a fairly intuitive person and grew up in a family that both accepted and encouraged “supernatural” senses, so perhaps tapping into this sense is a bit easier for me than the average joe. Nonetheless, I’m convinced that the creator endowed each of us with a healthy dose of intuition and it’s there for each of us to develop and leverage.
In my case, it manifests as a feeling, a KNOWING. I felt it when looking at colleges with my parents. I grew up in Minnesota and had a very negative opinion of New York but my parents had work in the area and insisted we drive around and look at schools in the tri-state area since they needed to be there anyways. The minute my foot hit the pavement in the Morningside Heights neighborhood of Manhattan I felt it…a deep, definititive intuitive hit that this was where I was supposed to be. I looked at my mom and said “Oh!” because I was struck speechless by the intensity of the sensation. My parents looked at each other and said “Oh no.” LOL. It wasn’t what any of us had wanted or expected for me, but I felt it and they witnessed it and we flowed with what was clearly something bigger than any numbers on a sheet of paper. That sensation was so strong that I filed it away and always take note when it hits.
That’s really what intuition boils down to – listening to your body and learning to interpret what it is trying to tell you. Some hits are very intense and clear…others are more subtle, but if you pay attention and note the patterns, you’ll see that the messages are consistent. I’ve learned over the years that when I’m in a career situation that is wrong for me or around people who don’t have my best interest in mind – I get nauseous or my stomach hurts. It sounds crazy but that’s just how my intuition speaks to me about what is “wrong.”
When something is right or meant for me, I get a tingly excited feeling and a deep sense of “this is IT.” I felt that feeling with my first property in New York and it made me a wealthy woman, so now, when I look at real estate investments – especially in a market I’m unfamiliar with, I will study all of the data and run all of the numbers and then I drive the area and walk around until I feel that intuitive hit. 9-10 units later after that first Harlem purchase, it has never failed me…I don’t invest in any neighborhood where I don’t feel that tingle. I can’t explain it, though I’m trying to here, but it is real for me and I trust it.
Don’t get me wrong, though, I don’t rely on intution alone. The numbers have to work. You have to do your research. You have to do the work. In the case of cash flowing real estate investing, that means first analyzing:
- the neighborhood – surrounding businesses, crime rates, proximity to city center/amenities, proximity to public transit, overall appearance, etc.
- the tenant stock – place a free dummy rental ad online pulling photos from the online sale posting and general location and see what kind of tenants you get for the price you’d need for the unit to be profitable (bare minimum is rent of 1% of purchase price to be worth further consideration). If you don’t get any responses, the place is overpriced or undesirable. If you get a ton of responses you can likely raise the listing price. If the quality of respondents in poor, it might not be an area you want to invest in.
- the building/house/condo – do a careful inspection and make sure you have a full understanding of what you’re getting into. I prefer to buy places that need less than $10k in repairs/improvements to be move-in ready, but always have an ample reserve on hand just in case.
- the overall numbers – does the rent/purchase price ratio meet the 1% rule? what are vacancy rates in the area? how much will it need to be move-in ready? I also look at things like property taxes, insurance rates, and local zoning/rental laws. Check out biggerpockets.com for more tips on the quant side of evaluating a potential real estate investment.
From an intuitive investment perspective, I like to look for undervalued areas that have all the ingredients of the most desirable and expensive parts of a given city. That’s what I noticed about Harlem – even when it was still considered a slum, it had beautiful brownstones, ample storefronts/restaurants, park space every few blocks, and express trains that take one to the heart of the business districts in 15 minutes. It’s also part of Manhattan. I would look around baffled that no one else was seeing what I saw – VALUE, beauty, specialness, convenience. One reason many couldn’t see the things that I saw was becuase Harlem was a neighborhood populated by lower income people of color. This is often the case in many cities and presents a unique advantage to investors who are able to see/feel beyond what soceity values to the core of a place. This is especially true in space starved areas like Manhattan, so I was lucky and saw my intuition quickly proven right when my first property value quadrupled just two years after I purchased it.
Fortune favors the bold and those who hone and trust their instincts.
Freelennial 