Mixing emotion with your property investment decisions can often become a very expensive lesson. As property is a tangible asset, far too often we will ‘fall in love’ with a particular property, ignore all of the facts and dive right in without doing our homework.
If you’re buying your family home, this can be a very different decision process as emotions will often play a key role. Your objectives when buying your family home might be to ensure that your children have a safe and happy childhood, that you’re simply happy at home or otherwise. The primary objective when it comes to property investing, at least for most people, is to accumulate wealth over time. This is why it’s so important that we’re thinking objectively and treating our investment property as we would any other asset class, ensuring that it ‘stacks up’ as a sensible investment decision. By following the data, or your head, rather than your heart, you will often experience much more positive long-term outcomes and achieve your financial goals.
Let’s look at some of the key reasons to look at the fundamentals as your guiding indicators for your investment rather than your emotions.
1. You’re not going to live in it
It is often the case that the greatest investment property is the one that we would never want to live in. Thankfully, not everybody has the same taste or life circumstances as we do and will often look for different attributes when it comes to them deciding where they want to live. It’s also important to recognise that purchasing a property near your own home does not necessarily make it a safer or more sensible investment decision.
Key Takeaway: Keep an open mind when it comes to deciding which locations you’re going to buy your investment property. If the fundamentals and data to suggest that buying a property near your existing home is a sensible option, then you may wish to consider this, but simply buying because you know the street or suburb does not actually influence market prices. There are also other tax benefits when it comes to building your property investment portfolio across different states, such as minimising land tax, and taking advantage of stamp duty concessions if and where relevant, however this should not be the main driver behind investing in a different state.
2. It’s an Investment, NOT Your Own Home
Remember why you’re investing in the property in the first place, to grow your wealth in a strategic manner. Be sure to conduct your analysis and that you’re aware of exactly how much the property will cost you to hold on a regular basis. It’s also important to consider any tax implications, whether they’re positive or negative before leaping into a property investment decision. Many people, when looking to renovate or make changes to the property, will consider what they would look for in a home, rather than considering the demographics of the local area. For example, if you’re empty nesters whose children have left home, and the main demographics of the area you’ve invested in are young professional families with young children, then chances are they’re going to have very different taste when it comes to finding the right property for them.
Lesson: Focus on the elements that will make the property a successful investment and be sure to crunch the numbers before diving in. Be sure to research the demographics and data of who your tenant is likely to be and consider what they would look for in a property. By focusing on your likely tenants, rather than your own tastes, you will often secure a much better and longer-term tenant because you’ve delivered to them exactly what they’re looking for.
3. Don’t pay too much for the property
If your investment decisions are driven by your own emotions rather than fundamental analysis of the data, this can and likely will lead to you over-paying for the property. There will always be other property investment opportunities on the market so be sure to do your research and consider what the maximum price you’re prepared to pay is.
Lesson: Ensure that you ask your property agent or adviser what a fair price for the property is, how long it’s been on the market for and what the comparable sales figures are in the local area. It’s also important to consider how the purchase price aligns with your own balance sheet and financial goals, and ensure that you set an upper limit before pushing forward. It’s also important to recognise that just because a particular property is more expensive than other similar properties in the area that it’s over-priced, or that because a property is cheaper than similar properties that it’s a bargain. There can be many factors behind these price differentials such as the quality of the fixtures and fittings, the overall layout and design, and even certain building defects.
By removing emotion from our property investment decisions, and simply relying on the data to guide us, we can make sensible choices and build our portfolios in the right manner over time.
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