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Beware, Property Investors! How Emotion Influences Us

“Dear Heart,

This is what happens when you try and make decisions on your own.

Sincerely,

Brain”

Be honest. When property investors find a property we are excited about and want to purchase, we tend to take the information presented at face value, or we downplay contradictory information because we want that property so badly! Love is blind! It ignores the bad points and forgives all faults!

This is where we let our hearts rule our heads. Be wary of instinctive behaviour we take as a “gut feeling.” It’s our heart or our emotions which tend to make us overestimate our knowledge and underestimate the risks. It should be the other way around.

There are common emotional mistakes property investors can avoid – as Belinda Punshon wrote on Finder.com . As we all want to avoid untenanted periods, limited capital gain or a low rental income, let’s heed her advice.

She listed some common mistakes that blur property investors investment strategy:

Fear of Missing out

We need to distinguish between noise and information. Media blasts can colour our judgement and make us fearful of missing out. A University of Cornell study (2001) found that companies with the highest press coverage in any given year underperformed in the next two years. Don’t listen to the media and feel you need to get onto the property market “at the right time”. Get into the market when YOUR time is right – there will always be another time.

Overpaying

Do not be pushed into making the wrong decision by overconfidence brought on by the optimism. Overconfidence means 90% of drivers believe they are better than average! You need to understand the financial obligations you are placing on yourself when purchasing a property and prepare for the worst-case scenario. Due diligence is key and having 3 months of mortgage repayments in an offset account is preparation. overcapitalising will put a strain not only on your bank balance but on your emotional wellbeing.

Overbidding at an Auction

Auctions are theatrics in motion. It is easy to get carried away and overbid. Have a plan in place and stick to it. If you are too emotional or fearful, get a friend to bid for you. Remember, most real estate agents want at least 20% more than is advertised for a property. Keep this in mind when bidding. If you overpay and lenders have valued the property lower, your borrowing power might be reduced.

Herding – the Great Australian Dream

A consensus view is not always the right one. Following the great Australian dream of owning your home in the right neighbourhood might be looking at history to predict the future and not right for you. Adapt to the market, don’t cling to old beliefs. This means that you might find renting in the right area better for you while you invest in other areas that have good capital growth.

Sh! Be selective about what you say

Do not give too much away to your real estate agent. If you show how excited you are about the property and reveal too much about your finances, he or she might try to negotiate a higher price. An agent wants the highest price possible for the property, so keep those emotions in check!

Avoid emotional attachment

You may fall in love with a property because it reminds you of your childhood home, or it has an incredible kitchen! Beware of emotions clouding your investment strategy. Try and take a step back and negotiate without the rose-tinted glasses. If you are finding this difficult, it is well worth investing in independent advice from experts like investment or financial planners, a buyer’s agent, an architect or accountant.

Do not blur your objectives

You look at a potential investment property and you see yourself there in the future. Remember you will be the owner, not the occupier. If you purchase a property with you and your family in mind, you forget the needs of a potential tenant. Research the demographics of the suburb carefully. You might find that it is near a university, so attracts students who are keen on trendy bars and close transport options.

Keep your strategy in mind, don’t risk your decisions based on other objectives.

When renovating – go neutral

Do not renovate to your personal tastes. You might rule out a huge section of the population if you decide on those purple tiles for the bathroom for example! You want to attract high-quality tenants and to do this you need colours and a floor plan that are neutral and practical.

Remember too that appliances are tax-deductible and depreciate in value over time, so don’t invest too heavily in them.

Don’t try and time the market

Remember we said there is no “right time” only YOUR time? Let’s elaborate. Markets are unpredictable and go through periods of growth, stability, correction and recovery. You don’t want to pay a premium for a property that is going to go into a period of correction – there goes your equity growth. However, long term, it might still be right FOR YOU. The best you can do is research. Study the historical trends of the suburb you are interested in. Look at the demand and supply factors and speak to professionals and other homeowners in the area.

Think twice, but don’t wait too long

It’s a fine balancing act.

If you take too much time getting ready to bid on that perfect property, someone else might have snapped it up. If you waste too much time looking, you can forfeit years of capital gain. You might then become more desperate and make an irrational choice.

To obviate these issues you need a plan in place. Know your budget; understand your timeline; have your cash buffer in an offset account (of about $10,000 – $15,000); and be comfortable with the return on your investment.

Are you financially ready? Good outcomes are based on preparation, not luck.

Avoiding Emotional Mistakes

Diversify. Invest in different areas and different types of properties. Look at different suburbs and dwellings that are at different stages of the market cycle. Then you have the flexibility to make the right choice when selling a property.

Remember when purchasing a property, have an idea of how long you wish to keep it. Having a clear exit plan in place can avoid an emotional purchase.

Think of your property investments as a long term business. You need to understand the tax implications, the financial risks, and listen to the advice of professionals. Keep aware of changes; keep your finger on the pulse at all times.

In summation

There are good emotional characteristics to have as a property investor. These are the ability to listen and take advice in a courteous and non-complacent manner. The ability to temper emotions with rational judgment and tons of research is a bonus.

As Albert Einstein said:

“If your head tells you one thing and your heart tells you another before you do anything decide first whether you have a better head or a better heart.”

Albert Einstein

In the world of property investment, it is better for property investors to have the former!

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