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Reproduced with permission.
Another factor that can thwart success when investing in property is the impact emotions play during the decision-making process. This mostly occurs when considering whether or not you would like to live in the property yourself – even if this was never your intention. Often, personal feelings (emotions) about living in a property or sentimental attachment to the location – usually because it is near where you currently live or have lived previously – will have minimal correlation with the likely return or success of the investment. If you were to purchase a share in a company, how heavily does the emotion of ‘would you like to work for that company’ come into the equation?
If you think of choosing an investment property as selecting an investment ‘product’ – which is what you are doing – you can consider your decision in a more objective or emotionally detached way. Otherwise you run the risk of overpowering rational thought with personal preferences and, in turn, reducing the opportunity for success by being closed minded to the true drivers of property returns.
Often people have confided that they ultimately purchased because they were just ‘over’ the entire search process. The time and frustration through the lack of success was ruining their weekends and they wanted their life back. They just wanted to purchase and be done with it!
This can happen for various reasons. One example is not truly understanding true market value, causing us to forever be chasing the market and falling short of the sale price. Lack of education and planning can cause us to feel like we are constantly spinning the tyres and not getting closer to our goal. Then, emotions get the better of us, and often, this ends up in an ill-considered decision. Settling for a ‘dud’ property that needs to be unwound once we come to the realisation a few years down the track is an expensive exercise. The prohibitive costs of purchasing and selling property in this country mean often any profits have been chewed up as part of the ‘learning’ experience.
Emotion can also overtake decision-making when the sales pitch is fantastic. Take care that you aren’t just purchasing from someone who is telling you what you want to hear. When someone reinforces our existing beliefs it is difficult to disagree with them, isn’t it? Most of us take pleasure in being told what we already thought was accurate. In fact, we all spend time seeking out people who share our outlook. This has its benefits, but it can limit outcomes and our ability to grow. “So you are telling me what I thought about property investment is spot-on, right?… AND I can make lots of money?… I like you… where do I sign?”
Again, I would never listen to a property seller’s advice or reasons for why to buy a particular property for investment purposes. Full stop! If someone completely independent from selling, who has studied, trained or worked in property for a period of time suggests the benefits of purchasing, that is a different story.
A common sales technique is to show you how affordable the property is due to rental income and tax deductions, whilst highlighting how ‘ALL’ property on average has grown by 10% per annum over the last 10 or 20 years. This strategy works in convincing people to buy because what is presented appears to be backed by genuine facts/data and is easy to understand. It paints a positive picture for purchase. However, what it fails to show are the variables that make this premise risky. What is much harder to ascertain is what the future holds for the specific properties they are selling or that you intend to purchase, namely:
a) future capital growth of the individual property
b) future growth in rental income
c) likelihood of the property in either point a) or b) outperforming the market.
When you feel the emotional pull of a sales pitch focused on ‘how easily you can afford the property’, especially if it heavily focuses on tax deductions, it is likely that you are being sold a one-size-fits-all approach to property investment. Keep in mind that any investment should first and foremost be purchased because it is going to provide you a great return via growth in value and/or cash flow. When someone’s main rationale for you to purchase is based on tax deductions and affordability at the time of purchase rather than primarily on the future performance of the asset itself – however well-meaning – I would be very wary. Remind yourself to keep your emotions in check and your ‘logical’ brain turned on ‘high’!
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David Johnston, Managing Director