4 Emotional Traps in Property Investment

By September 14, 2017Buying, Investing

Trap #1 – This is for financial security, not ego.

A question frequently asked is: how many properties do you own? People who ask that question have failed to grasp the fundamentals.

At a Get Rich Quick seminar run by a notorious spruiker a few year ago, attendees seemed engaged in a competition of “who owns the most properties”. It was more about ego than sensible investing.

Anyone with fewer than ten properties was scorned. One speaker on stage was derided by the audience because he owned only four properties. The fact that each was a $1 million-plus property with little debt was not considered relevant – it was all about how many properties you owned.

More relevant questions are:-
  • Is the value of your portfolio growing?
  • Does it provide income or does it cost you money?
  • Is your property portfolio helping you to achieve your goals?

More important than the number of properties owned is the nature of them and how they are performing in helping you to achieve your objectives. It makes more sense to own five cash flow-positive properties than ten negatively-geared ones.

 

Trap #2 – You’re not going to live there

Buying a home can be an emotional business. Witness the collective tizz we saw from buyers in the ritzy suburbs of Melbourne and Sydney in 2013 and 2014 when people became caught up in the hype and euphoria of auction fever.

Buying for investment is a different process. Logic replaces emotion as the key driver. Or it should. This is the mistake some investors make: they bring the same emotions and process to an investment as they do to buying their home.

They buy things they shouldn’t and overlook the best options because they’re in downmarket areas or are dwellings they wouldn’t choose to live in themselves.

A Good example in NSW …

Many of the communities dotted along the NSW Central Coast are camera candy. The towns of the Port Stephens region have stunning settings, with houses perched beside wonderful beaches. There’s evidence of vibrant communities with happy residents.

Many people would be happy to live there. But you shouldn’t buy an investment property there. The long-term capital growth record of most of these places is below-par and there are few economic pistons to generate out-performance.

This is an issue for Sea Change locations along the NSW coast. There are so many of them and little to distinguish one from another in investment terms.

It’s only the few with specific growth drivers like improved transport infrastructure that command investor attention.

A little inland from some of those appealing South Coast towns is Goulburn, which is a much better investment prospect. You might not choose to live in Goulburn but it’s a better prospect for an investment purchase. There are diverse drivers of economic activity there and that translates into housing demand, which in turn generates price growth.

You probably won’t be suggesting a family holiday in Dubbo but it should be on a list of possibilities for property investment, as a strong and diverse regional economy with good growth prospects. The population is growing and the property is affordable.

It’s emotion (and often vested interests) dressed up as logic.

 

Trap #3 – Peripheral issues don’t matter

History shows that lifting interest rates does little to quell a rising market. There’s no evidence that lifting interest rates correlates to a fall in dwelling prices. Investors need to avoid becoming emotionally impacted by peripheral issues like interest rates and media speculation about them.

That meant an increase from 6.25% to 7.25% in six months (compared to 1.5% in February 2017). But dwelling prices kept on rising. Indeed, the rate of price growth throughout 2007 and into the first half of 2008 kept increasing. The more the RBA lifted rates, the faster the rate of price growth. It was only the onset of the GFC that finally slowed the property market – and only temporarily.

There’s no evidence that rising interest rates correlate to a fall in house prices – or that falling interest rates create booms.

It’s easy for property investors to be distracted and discouraged by negativity generated in the media by organisations pursuing political objectives. It’s important not to let these peripheral issues scuttle an investment plan.

Examples of negativity generated by organisations for specific reasons include claims of a “chronic housing shortage crisis”, claims of an “affordability crisis” and comments about “bubbles” with an imminent threat of prices collapsing – all of them furphies.

The message here is that investors need to avoid becoming emotionally impacted by peripheral issues like interest rates and media speculation about them.

 

Trap #4 – Don’t insist on buying locally

One of the biggest mistakes. New investors make is clinging to the notion that they should buy in their own backyard. Many potential investors work on the assumption that it’s smart to buy in the area in which they live. It usually isn’t.

Some buyers seek to invest locally because they want to be able to drive past and keep on eye on it. Others think it makes sense because they understand their own market.

Still others reason that if you buy close to home they can self-manage it and save some money. And there are many who believe that you must personally inspect any property you buy and therefore you should buy locally for the sake of convenience.

None of these arguments stands up to scrutiny. The key point is this: when you buy an investment property you want to make the best purchase you can get your hands on.

It’s highly unlikely that the best buy in Australia will be found in your local area. Your best chance of buying well in an area that delivers the rental returns and/or capital growth that you’re seeking is to consider the whole nation as your market.

Many people believe they know their local property market well. If you’re one of those people, ask yourself these questions.

  • Do you know the median price for a four-bedroom house in your home suburb?
  • Do you know what percentage of households rent in your suburb?
  • Do you know the local rate of unemployment?
  • Do you know the vacancy rate for two-bedroom apartments in your suburb?
  • Do you know which industry sector in the biggest provider of jobs in your local area?

Few people know the answer to any one of those questions, much less the answers to all of them. The notion of saving money by self-managing is a serious mistake and a classic case of false economy.

Unless you’re independently wealthy and have a lot of time on your hands, you do not want the hassles of property management in your life. Find yourself a good manager and pay them to handle if for you.

Then you are free to buy anywhere in Australia. The belief that you need to personally inspect any property you plan to buy is also a furphy and one that limits your options as an investor. Buyers can protect themselves by engaging suitable professionals – such as valuers, building inspectors, pest inspectors and property managers – to check out the property for them.

 

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