Emotional investing is risky business
Updated: Jun 6
Sometimes in life ‘going with your gut’ can help you make the right decision, but with property investing it is generally believed that you should take the emotion out of purchasing and use research and logic instead.
Interestingly, while your own emotional decisions may not help you make a lot of money in property investing, the emotions of others certainly can.
Property is the only asset class that is not dominated by investors, meaning that your return on investment can be amplified when owner occupiers pay above market value for a home that is in close proximity to your investment property.
This is just one example in a myriad of variables that can make a difference to your portfolio, however, so if it seems like the battle between your head and your heart isn’t going to be won by either, it is worth considering the following emotional factors and getting a handle on them before they control your important decisions.
1. Fear (of missing out)
Fear can be overwhelming and quite possibly the most detrimental emotion when it comes to property investing. Fear of missing out (FOMO) can be an even more powerful thing.
During Sydney’s recent property boom, which reached its peak in July 2017, investors who purchased during this time but sold a mere two years later during the low point would have experienced great losses, not only in future earning potential but also by underselling their properties - often by hundreds of thousands of dollars – because they were scared about missing out.
An uneducated investor will look at a rising market and make an irrational purchase thinking that prices will continue to rise and then prematurely sell believing that the prices will continue to decline rapidly.
By overcoming the fear of missing out, you can weather the storm that brings troughs and peaks to the market and hold steady with your investment while the market recovers.
Building a property portfolio is contingent upon solid capital growth on your first property, as it empowers the investor to release that equity and turn it into a second purchase. This can be a double-edged sword, however, as the feeling of ‘nailing it’ on the first go can create a false sense of security and have you believing that you’ve got the Midas touch and that every property purchase will be a winner.
What this beginner’s luck doesn’t account for is market movements or shifts in the lending climate that may have occurred between purchases; these factors can be a catalyst for making unsound decisions on the next buy.
Investors who are unable to put their pride aside typically get caught in one of two traps: they overpay at auction because they are sucked into the street theatre or they have missed out at auction before or they want a large portfolio quickly, but are forgetting that quality is greater than quantity.
In order to make the best financial decisions it is important to set long term goals and not allow ego or pride to force you into hasty decisions that could ultimately cause major setbacks.
Keeping up with the Joneses is a sure-fire way to send anyone broke, yet all too often people are willing to buy things they can’t afford, simply to impress people they don’t even like!
Property investing is one of the worst situations in which to overspend, but it is likely to happen without proper forward planning and by letting your emotions take control of your decisions.
It should go without saying, but you must not compare yourself to others. Be realistic about your income and your long term goals and factor in the economic climate. It makes far more sense to comfortably make a purchase on a less impressive (and less expensive) but more sound investment than it does to overextend yourself by purchasing a property that may be brag-worthy but more difficult to rent out.
Big lofty goals are an important part of building a substantial asset base, although we must remember that it is human nature to overestimate what we can achieve in one year and underestimate what we can achieve in ten years.
Property is a long term investment, so proceed with caution and avoid the temptation to purchase too many properties in the first few years if it only means you will be decreasing your cashflow.
In the long term, capital growth will be the reward, but you must keep an eye on cash flow in the short-to-medium term because that is the only thing that keeps you in the market long enough to realise your equity gains.
There is nothing wrong with having ambition, but it is also extremely important to remain conscious that too much ambition can lead to risky investing that might result in net losses from behaviours such as selling properties too soon.
There are plenty of other emotions that come into play during a property purchase – love, worry and elation, for example – but taking heed of the above four and ensuring they are in check will serve you very well if you want to maximise your return on investment.
If you know that your emotions play too much of a part in your decision making, be extra vigilant. Pinpoint what emotions are driving your behaviours and slow them down. Talk to a subject matter expert who can mentor you before proceeding and if you don’t know of anyone suitable, it is advisable to identify another trusted person who can give you some independent advice before pursuing any more investments.
Outside of finding a mentor there are plenty of books and podcasts available, it might take some time to find the right ones but when you do, these resources will help to educate and equip you with the knowledge to make better investment decisions for your future.