A property investment is a type of property meant not for the owner, but for the property’s tenants. This means that the property should not follow the owner’s preferences, rather it must follow the preferences of potential tenants. All decisions made for renovating the property must be inclined to what can appeal to the tenants and not specifically the owner’s choice.
It is important to control emotions and refrain from making impulsive decisions. Property investments must be treated as if it is serious business. Like business, the investment property generates rental income, capital growth and increasing valuation. The point of entering the real estate market and joining its competition is for success and a positive passive income, not one investor got into this investment venture just to fail. However, you are human, and it is inevitable to feel emotional when caught up in unforeseeable circumstances especially in property investment. It is best to limit your emotions in order to become a better investor.
How and why does property investment stimulate emotions?
There are numerous reasons that could explain how and why emotions stir up within you while you’re managing your property investment/s. However, these may be one of the reasons why it happens:
- A house/home is basis of our life – A housing property is a fixed asset that is owned and lived in. It can also be an investment to be rented. Home is a place that gives off a sense of belonging to the family or to individuals, a place where a lot of memories can be made and a place to establish connections with family or loved ones.
- Largest asset class – Real estate is the largest asset class and it is a more profitable asset class than all global stocks combined. Stocks are more passive than real estate, but the stock market is more volatile. Real estate is a tangible asset, the investor can adjust it to however strategy they want, and it is a much safer investment than stocks.
- Connected to individual financial goals and ambitions – The amount of effort an investor commit to their investment property shall entirely depend on their financial goals and ambitions. Is the investment property for a passive income aside from the main income, or is the investment property a part of a property portfolio which acts as the main income stream.
What is the meaning behind the listed reasons and how do they connect to being emotional over a property investment?
Property isn’t exactly cheap to buy, it is only natural to feel emotional during the decision making process of finding the right property and buying it. Although buying a home and buying an investment property may seem different, they are pretty similar whereas they can emit a surge of emotions from the investor. One common mistake of first-time investors is that they assume that their ideal home property is synonymous to everyone else’s ideal home. Purchasing an investment property that suits an investor’s taste may end up as a failure or close to it. Investor’s may also miss out on good deals and properties if they remain true to their preference rather than buy a property that could potentially be a quick magnet for new tenants.
It is not about completely disregarding emotions when it comes to property investments. It is better if the investor remains neutral during the whole decision-making, property acquisition up until receiving new tenants. Neutrality can be a safety-net for the investor because letting emotions dictate your next move can exponentially increase any risk of exceedingly entrusting finances into a single property or buying and investing on an underperforming property. The consequences of making choices similar to the two previously mentioned scenarios are low or negative rental yield and decreased capital growth.
An investor must learn to regulate their emotions, because pent-up emotions may create the feeling of impatience. Impatience can lead to lethargy, unpredictability and impulsive decisions. It’s a combined feeling of not wanting to prolong the trouble of the acquisition process and not wanting to exert too much effort anymore, the investor would simply purchase the property without much thought.
What is the most common mistake of conservative property investors?
Investors procure property investments from areas that have promising opportunities for growth. This is an effective and all-around strategy, but sometimes investors implement it incorrectly. Most often than not, investors buy properties from their neighbourhood. Although it is understandable that since the investor has first-hand experience of the living in the area, they would know that there is still potential for investing in other properties in that same area. This situation was able to utilize the right strategy, it was simply used at the wrong location or market.
The mistake of not exploring other locations can burden your property portfolio. Just as any other property is an asset to your portfolio, your very own house can also aid in strengthening your portfolio. However, when your properties are all located in the same suburb or locality or even remotely close to each other, then it may cause some problems. One problem is that when there is a market downfall in your area, then all the other properties are just as affected as your property is. This reflects poorly on your property portfolio, so it is best to avoid this situation as much as possible.
Another common mistake is buying a property which is intentionally bought as a vacation house for the investor’s desire. Renting out vacation houses is rather difficult because the investor would occupy the house for a short-term, but who shall be inhabiting the vacation house long-term? Vacation houses have assets that a normal residential house would not have. The facilities and amenities close to the vacation house may be good additional features, however the tenants may not be actively looking out for these types of features. This can end up with discrepancies because the vacation house may rely on the timing of seasons and holidays which may not become a reliable source of rental income amongst your other rental properties.
Investing on properties in areas you have no personal knowledge of may make you reluctant and uncomfortable. However, by exploring the unknown and researching on these matters may help you to broaden your horizons. Doing so can exceptionally bring good results as you’ve now done your best to maximize gains for your property, positive rental income and property growth.
How to detach emotions from crucial property investment decision-making?
Clinical preparation and planning are recommended in order to separate emotions from crucial property investment decision-making. It is suggested to write a complete list of all the steps you must undertake during the whole course of investing on a new property. Always put side notes to each step. Notes like goals, strategies, course of action, advice and reminders to yourself when you are currently in that step. Even if the note is a common sense kind of reminder, write it down because you are trying to prompt yourself who may have forgotten to control your emotions from ruling over your judgement. It is even better if you update that list of steps with notes from time to time. Do not erase or replace any of the notes, just keep adding them so that when you are lost during the process, you can simply read it back again.
Here is an example of a list for investment planning.
- Investor’s rationale
- What is the investor’s financial status?
- What is the motivation for the investor to invest on properties? (to save money for the future, paying for further education or a child’s education, as a retirement plan, etc.)
- Note: Success or failure, remember that you’ve done it for ____
- Reminder! You’ve done your best, just keep on going. Don’t doubt yourself.
- What are the goals based on the reasons for investment?
- What are the plans for short-term and long-term investment?
- Getting ready for property investment
- Question (for professional counselling): what can I do to fix my rejected pre-approval?
- Reminder! If it didn’t work, that’s okay. Just get more credibility based on what the professional advised, then come back after waiting and when you’re ready again.
- What is your investment strategy?
- If you realized that the main investment strategy is not suited for the property, what is your backup investment strategy?
- What is your target market?
- Note: Research on demographic data
- What are the criteria for the investment property?
- Investor’s criteria
- Potential tenants’ (target audience) criteria
- Property Location
- What suburbs are you interested in?
- What properties in those suburbs are you interested in?
- Remember! Don’t listen to what your heart desires, read the facts and statements first before you decide.
- Who should you go to when you need advice or when you have questions?
- What property should you invest on?
- What price offer can you afford and are comfortable with?
- What are the terms you can negotiate with for the investment property?
- What are your compromises now that you have the investment property?
- What insurances do you need for the investment property?
- What are the expenses you need to cover?
- What do you need to do when rental income does not cover the property’s expenses?
- Remember! Don’t worry, this is just a small hiccup. Try to discover what your next strategy would be for the property investment.
- What can you do to improve the success of your property investment?
Bear in mind that this is your personal plan, it does not have to be formal, and it does not have to be neat. You can add more to what is shortly listed above. As long as you can understand the path you’ve written on your plan then that’s all that matters. If you are confused with some parts and wish to have it clarified by a professional, you can also write down questions all over the list and highlight them.
As an investor, having a ‘go with the flow’ kind of personality is too risky especially when it comes to property investment. There is already risk in investment, you don’t need to add more to it. If controlling emotions is still difficult even though you are conscious of what you already need to do, then it may be good if you enlist the help of an unbiased individual who is not associated to anything real estate related.
5 emotional stages of property buying
There are some properties that when you first learn about them, you can’t stop thinking about them. When you were able to research it and it looks like a good deal, you suddenly started to like it more. You haven’t even bought it yet, but you’re starting to imagine the rental returns it can generate. Infatuation for an investment property is normal, but always question why you like the property. Do you like it for personal reasons or do you like it with an investor’s mindset?
With technology and its innovations, almost all information is accessible via the internet. This includes data on properties up for sale especially images of the property. Everyone knows that the saying “to see is to believe” is a critical and logical statement where the mind rules over the heart fantasizes. Whereas “love at first sight” is an emotional declaration where the heart overpowers whatever the mind’s standpoint. Funnily enough, these two statements of opposite rulings can be tested especially when it comes to property investment.
Normally, an investor must research on the property’s background and demographics. Don’t be fooled by the numbers because there has to be a balance. It is difficult to imagine the success of the property without visually seeing the property and its condition. It Is also the same for visiting the property site. Don’t be fooled by what you see on the surface.
There is a large chance that there may be more people who are interested in buying the same property as you. For an investor, that’s a good sign because you can gauge the demand for the property. Even if there aren’t as much interested buyers, it can be a sign that if you truly aim for that property then you have to work on how to fix the property in order to entice the attention of potential renters and buyers.
However, it is inevitable for your prospective properties to have so many similarities that it is hard to decide on which one to invest in. Don’t let yourself remain disoriented with what you want to choose, rather let yourself some time to compose your thoughts. You only need to invest in one property unless you have enough money to invest on all of the properties. When you have to choose between all the properties, disregard all the common traits of the property and look at what are the factors that make each property different and what are the factors that make such property stand out amongst the others.
Even though you’re buying an investment property, it’s hard to ignore your excitement for good news. There is always competition and everyone is trying their best to make an offer which can help them secure the property. Although, the offer is within the comfort zone of the buyer and what they are able to commit.
Starting off positively on your investment property does not guarantee that throughout the whole venture, things will turn out positively. “You win some, you lose some”. Even if you brought out a good deal and thought that you will obtain the property, you must still expect unfavourable outcomes. One small setback such as not getting the property must not keep you from achieving your investment goals as there are other properties that could be invested on.
Let’s say you did win the auction, have negotiated on the terms, and you were able to get the property. The actual investment operation has begun only after getting the property. Of course, congratulations is in order since you were able to acquire that property, by no means is that a small feat. After the euphoria of getting the property, you must remember that you have the responsibility of working on the property in order to receive a return of investment.
Just as Benjamin Franklin said, “Diligence is the mother of good luck” which means that success will come if you put continuous effort and earnestly work hard and this success may come as if luck had helped you in your achievements. Possessing new assets bring responsibilities that can put pressure on you as the investor. Remember to take your time and to keep track of your plans so that you won’t get distracted. You must learn how to work even under pressure and focus on the present, tackle one problem at a time.
After laying out the groundwork for your investment property, it will start performing for itself. Albeit rather slow at the beginning and the rental income may immediately go towards the property’s monthly expenses, but there shall be capital growth and gradual property value increase. When the investment property’s cash flow finally turns positive, that’s when you can relax a little.
“Learning to celebrate success is a key component of learning how to win in the market” as advised by Douglas Conant, you should treat yourself after a job well done. It doesn’t have to be an extravagant celebration, it’s better that you treat yourself in a way that could motivate you to keep advancing with your property investment. However, make sure that the success and celebration still prompts you to do the best of what you could because there is no room for complacency.