If you haven’t got a story about how your investment returns were lower than you expected, you probably have a friend or two who do. Understanding the causes of these less than desirable outcomes and better yet, ensuring they don’t happen at all will allow you to maximise the chances of your investment choice.
Lack of due diligence – The most common cause of lower than expected investment returns is the lack of knowledge of, and access to, the relevant information prior to making an investment decision. This may be due to lack of effort, care, time or simply not knowing where to go to access the appropriate information. One such example that can provide a basic indication of risk is simply discovering which property types, banks are more reticent to lend against. Banks have spent more time analysing property risk on the macro level than any other group and their information can help to minimise the risk of making an investment-mistake. If a lender has a reduced loan to value of the property ratio (LVR) allowable for a certain type of property or post code, then clearly there are concerns around the likelihood of the property holding its value, let alone appreciating.
Unable to differentiate between fact and fiction – As you know, the media can often give you only a portion of the full story. You may have undertaken significant research but are simply unable to differentiate between the fact and fiction that is circulated within the media and by those with vested interests in selling the property ‘product’. This can commonly result in an investor having little understanding of the true risks they are taking when deciding which real estate ‘product’ to purchase. Growth rates quoted in a suburb can be affected by something as simple as a new development being sold well above the average price for that suburb. Media might then quote that suburb as having grown in value and investors may be swayed to purchase in the area based on this information.
Emotion getting in the way – Another major contributor to a lack of success when investing in property is the emotional element that can sometimes come into 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. More often than not, personal feelings towards living in a property will have no 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 enhance your ability to reduce the emotional attachment to the investment decision. Otherwise you run the risk of overpowering rational thought with personal preferences and thus reducing the opportunity for your success.
Having a greater grasp of these areas outlined should help you to ensure that you make a more informed property decision and stack the odds in your favour. Take the time to discuss how Property Planning Australia can help you consider each of these elements and how they relate to your personal circumstances.
In the second part of this article we will look at what causes outperformance.