Why Investments and Emotions Don’t Mix
26When it comes to property investment, you need to leave your emotions at the door. In fact, if you really want your investment to be a profitable one, you’ll have to look at it from the outside in and study the numbers rather than falling for what you love.
Investing in property is exciting. It’s daunting. But if it’s done right, it can be both satisfying and financially rewarding. And that’s the key: if it’s done right.
Too many Aussies fall for the trap of investing in property that appeals to them, rather than property that will maximise their returns. And the simple reason is this: they allow themselves to become emotionally invested in the purchasing process.
We get it: we’re all human and we all generally make decisions based on emotion. But when we buy because we ‘fall in love’ with something (be it clothing, household items or anything else you care to name), we’re likely to spend more than we should. We’ve all been there and done that. But in the case of real estate, you’re talking big dollars, and this could turn out to be an expensive mistake.
Look. Think. And do your Numbers…
An investment property is not one you’re going to live in, right? So, you can afford to be somewhat impartial.
Do due diligence ahead of time – look at properties in different areas and markets, remembering that there’s plenty of choice out there. Keep searching until you find one that meets all your criteria.
Don’t look for a home you love, because more than likely it won’t suit your prospective tenant. Realistically, unless your renter has exactly the same taste as you, a house that you love simply won’t turn them on.
Have a Strategy
To effectively remove the emotion out of the purchasing process, you need to have an investment strategy. Understand exactly what you are getting yourself into and why. Set goals and keep yourself focused on the long-term plan.
Understanding the Market Cycle
Market cycles happen in every business environment, and the property world is no exception. Successful investors are savvy about what’s happening in the real estate niche, and they become experts in predicting what the next few years will hold. While there’s no substitute for experience, a newbie to the investing market can make intelligent decisions by studying what’s going on.
Real estate cycles are driven by a bunch of socio-economic factors such as interest rates, the economy and consumer confidence. Each cycle can be roughly broken down into 4 stages:
- Boom
- Downturn
- Stabilisation
- Upturn
The number of years it takes to complete the full cycle will vary from region to region, and even between capital cities.
As an investor, it’s important to be cautious about market sentiment – just because the media is publishing doom and gloom, doesn’t necessarily mean it’s a bad time for you to buy. In fact, purchasing at or near the top of the cycle could be your worst mistake.
Should Your Investment Be Close to Home?
Not necessarily. A lot of investors begin their journey with a visit to the local real estate agent rather than jumping online to see what’s available all around the country. Amazingly, a huge proportion of investors purchase within a 10km radius of their own home!
Again, it’s those wretched emotions taking over – buyers are liable to focus on cities or suburbs that appeal to them, rather than looking at the markets where there’s a need to be filled.
Do your research. Find out where the market cycle is in each city/area. Be open-minded and look all options.
Many successful investors have never physically seen the homes they own – with a competent property manager, you can relax and enjoy the benefits of a successful investment without having to ever visit the property yourself!
Understanding and Controlling Fear
In the investment world, consider two little acronyms that can have big consequences:
- F.O.M.O – Fear of Missing Out
- F.O.N.G.O – Fear of Not Getting Out
The first is what drives prices up – buyers panic because they’re emotionally invested in a particular property, and they’re prepared to pay an inflated price rather than loose the opportunity.
The second is the fear of being caught in a financial situation out of which there’s no escape. When the market gets shaky, there’s always some investors who panic and sell up quickly, most likely too cheap.
Learning to control fear and think rationally rather than emotionally is a skill that investors must learn. If one property sells, there’s always another; what goes down will eventually come up again…
When purchasing an investment property, you need to keep a cool head and look at the figures. The team at Love & Co understand the principles of successful investments and are here to offer advice and help you every step towards a successful and rewarding investing experience.
The information in this article is for information purposes only and should not be taken as financial, legal or personal advice.
While care has been taken to ensure that information contained in this article is true and correct at the time of publishing, any changes after the time of publication may impact on the accuracy of this information.