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There are many mistakes investors can make, but here are 5 common times they can let their emotions get in the way.
Blogger: Cate Bakos, director, Cate Bakos Property
Investors face all kinds of challenges throughout their journey; from inception of a strategy, financing the purchase, sustaining any cash flow shortfalls, maintaining a happy tenant and dealing with the day-to-day items that arise.
But of all the mistakes that investors can make, some of the most harmful are those they cause for themselves by letting pragmatism slip and emotion get in the way.
The first mistake is investing without a plan, or dreaming up tactics without a real strategy. Examples include investing in property to ‘prove a point’, have a good dining table discussion piece or, worse still, picking a magic number of properties to target with no real thought given to what the result may be. I often meet people who have a specific goal to purchase 10 properties in 10 years. When I ask them why, they almost always find it impossible to articulate. Ten is a round number, after all, and one property acquisition per year is certainly doable. What people should consider is; what type of performance do they want out of their property portfolio? Do they wish to amass equity at the fastest possible rate? Are they looking for retirement income that will stream in passively once the properties are paid down? Do they want to contribute to the holding costs during the acquisition phase or are they looking for cash flow neutral options? There are many things to consider, but most investors don’t put the time in at the start to really question what it is that they want their portfolio to do.
The second mistake is a delusional mistake. Often buyers delude themselves that the holiday home or the coastal area they love to get away to on their weekends constitutes a good purchase. In most cases, remote coastal holiday hotspots don’t enjoy consistent capital growth. Worse still, they are almost always hard to rent to quality, long-term tenants throughout the year. Holiday rental arrangements are certainly an option, but most investors don’t realise that the management fees are significantly higher than the standard lease fees – and, unsurprisingly, most owners want to use their holiday home at the peak rental periods. Overall, it’s a terrible idea and one I often steer aspiring buyers away from unless they have amassed a sizeable portfolio already (which can potentially buffer the cash flow shortfalls and price-volatility of the holiday home purchase).
The third mistake is the most emotionally challenging for many. Country or interstate investors who buy property for their student children to live in fall prey to a potentially difficult situation because, generally speaking, undergrad students don’t make the world’s best tenants. Students can be problematic tenants for several reasons:
I’m not suggesting all students are bad, but they don’t make the top of the list on the ‘Target Tenant’ page. So for a parent to put themselves in the position of being exposed to student tenants means they also take on a tough challenge if the property gets damaged, neighbours get upset or if rents go into arrears (if their child and/or house mates are contributing financially). Taking a child to a Tribunal doesn’t rest comfortably with any parent. When asked, I always advise investors to consider keeping their student children’s living arrangements at arm's length and to avoid targeting student hotspot areas and to target quality tenant areas with strong growth prospects. In most metro city cases, parents can help their children find appropriate accommodation without having to buy it for them. From assisting with the searching, bond, application process or helping with the rent itself, the parent’s investment strategy should remain pragmatic and not dual-purpose.
The fourth mistake is to embark on an investment property search with the thought in the back of one’s mind that one day they may live in the property. Every time a client engages my services with this niggling thought in the back of their mind, they jeopardise their chances of success because they lose their pragmatism. One recent client passed up properties that fit the brief perfectly and for a short while I couldn’t understand why he rejected what were abundantly clear to us as great investments. His comment about one of the property’s living areas gave me an inkling that he was not looking with a purely investment set of eyes. Further questioning confirmed my thoughts. He did want outperforming capital growth, he did want the perfect target tenant, but he also wanted to picture himself potentially living in the property some 10-plus years from now. Unfortunately, his mental picture of his future home did not complement the search parameters and metrics we’d defined. It was a fruitless search, because emotion got in the way.
The final mistake is the least obvious. It is telling the wrong people about what it is you are embarking on. Our loved ones want to protect us, guide us and help us, but sometimes they can make the worst support crew for a new investor. I can count on 10 hands the number of times a worried parent has derailed an otherwise good purchase. I’ve watched supportive friends weigh in with their comments on a property and change the landscape completely for the purchaser at the last hour. If investors feel the need to bring advice or support people, they need to ensure that their friend or family member understands the brief, remains pragmatic and isn’t so risk-averse or envious that they could threaten the plan.
I learnt the hard way early on as a passionate, young investor. I told my own beloved Dad about a property I wanted to buy in 1997. He talked me out of it on the basis that the negotiated price of $132,000 represented too much debt for a young woman to take on. The same house is now worth around $1.1 million and, luckily for me, I only let my Dad cost me one good opportunity. I learnt to tap into people who would be supportive and pragmatic and I’ve never looked back.