October 9, 2020

Emotional Investing: Don't Make These Mistakes

Property investment can be an emotional rollercoaster even at the best of times. Unfortunately, emotion has proven itself time and time again to be the biggest downfall for investors in their quest for short, medium-and long-term financial freedom.

There are endless reasons why more and more investors choose to invest in property. Now more than ever before, the prospect of consistent regular income and generous capital gains acts as the beacon for thousands of investors who’ve been lost in the fog of Covid-19. When choosing to venture into property investment, these are the two biggest factors which must remain at the forefront of your decision making from start to finish.

Any budding property investors who begin their takeover of the property market awash with emotions often become blind sighted into making poor decisions on their own behalf. This is why we have drawn up a “do’s and don’ts” list to consider when navigating through investment paths whereby one wrong turn could bring your new journey to an end before it has even begun.

Property Investment Do’s

Establish a timeframe

Before you take on any investment, it is important to identify what goals you have and a timeframe to achieve these. The most successful of property investors understand that property investment is a long game. These investors all follow a similar pattern in putting in the least and taking away the most from their investments. The more experienced the investor, the more emotional bias is eroded from their judgement which is proven to be the key to success in the property business.

A longer-term strategy centred around fixed monthly cashflow and financial sustainability with the absence of sentiment and presence of a clear exit strategy will help ease concerns and build confidence.  If you’re unsure how committed you will be to a property investment you should consider why you are here in the first place, your age, attitude to risk, and ultimately, your vision for the future. Most property investors will have one eye on retirement and will work to stabilise a strong portfolio to reach this in both a secure and timely manner. Whereas a young opportunistic property investor may stretch their barrier to risk by flipping properties to fulfil their shorter-term needs and goals.

Diversify your property portfolio

With every investment comes an element of risk—the two are a package deal. If you are a regular reader of Elavace articles, you should know by now that spreading your investment is the best way to nullify the impact of any changes to the market. Having a balanced and diversified property portfolio can also nullify the influence of emotional bias because of its inadvertent role in preventing you from making rash decisions.

The wisest and most obvious decision you can make is to invest your money in multiple properties instead of one. This is because having interest in multiple assets puts you in the best position to mitigate against risk while building confidence in the stability of your investment. In the event of any one investment taking a negative turn, having more than one property to fall back on can help you to make informed decisions instead of jumping ship at the first sign of danger.

Another common way to diversify your portfolio is to invest in a wide variety of locations. When starting your path into the big scary world of property; it can be easy to fall into the trap of investing close to home in the same area you live in. While this may make sense because you have the advantage of a real insight into the region, you are vastly limiting yourself to a huge market waiting to be had. Big cities within the NorthernPowerhouse such as Liverpool and Manchester are growing increasingly popular amongst investors searching for lucrative rental yields and affordable investments. There are so many more different cities and regions to choose from; each with their own price brackets and levels of growth. It is up to you to step outside of your own emotional comfort zone and expose your portfolio to a different type of thriving market.

Conduct your due diligence

Before you invest in a property, you need to investigate the ins and outs of the property to minimise any risk of losses or potential problems developing down the line. Now, this process is always going to be time-consuming and at times, expensive, but there are thousands of investors out there who wish they had been more vigilant and now face years of debt.

Like many investors, you may be keen to pursue new and off-plan development policies out of excitement for the ready-made capital growth in this kind of investment. This is all well and good until you discover that the properties have been built to a poor standard and you are paying money out of your own pocket at the fault of your developers. This is why you need to research into your developers and gain an insight into their track-record. You can do this quite easily by looking through their website and identifying how many previous finished developments they have to their name.

Another method of due diligence is browsing through news articles - you might be surprised to find negative news stories about the location or property developer! There may also be recent negative connotations surrounding the location which could potentially dismay tenants from living in that region.This would only make it harder to fill your property and longer for you to start gaining regular income.

Fortunately, we at Elavace have proper consultants who can take on the burden of these responsibilities for you. Being a partner of Elavace means that your best interests become our best interests, which is why due diligence is paramount to all of our clients’ investments. Moreover, Elavace will only conduct business with the finest of developers and to ensure they maintain our high standards we take it upon ourselves to issue frequent questionnaires and background checks.

Be patient

As previously mentioned, when choosing the best property to invest in there needs to be careful analysis into your own circumstances, investment strategy and objectives. The search for the perfect investment can sometimes take longer than expected, and so it’s important to remind yourself that this is completely natural and all part of the process. Patience is a virtue –so when that flame of hope starts to quiver the best thing you can do is stick to your guns and not act on emotion! Desperation can often cause investors to broaden their search and open the floodgates to more risk and consequently, more problems further down the line.

To put it simply, sometimes the market doesn’t give the right signals to invest. And if this is so, don’t be afraid to stand down and search in another location altogether. The best and most recent example of this can be found in London. The capital once boasted staggeringly high rates of growth which lured thousands of property investors from all over the world for many years. Every dog has its day. In the three years following the EU referendum, investors had started to realise there was life outside of the South and moved to the North-west to take advantage of the huge investment potential. And that’s not all- Covid-19 has added more fuel to the fire with many residents now working from home as the prospect of a second lockdown beckons across the country. Workers are reassessing their housing needs and moving out of the capital into properties with more communal/office space and perhaps even a garden for a fraction of the price.

Property Investment Don’ts

Don’t buy your dream home

When searching for the best investment property on the market, you must never forget why you are scanning through Zoopla or Rightmove in the first place. It is easy to be swept away with the thrill of investing in a new property and how tempting it can be to transform this into your own ideal home. The issue with falling into this trap is that your tastes aren’t likely to be the same as that of the person who is going to be living in the property. You have chosen to invest in property as a source of both short and long-term income thus, it is best for this to meet the demands of the widest possible audience.

If you find yourself torn between a property based within a city such as Liverpool where demand for rentals is higher than ever, or a rural detached house with a snazzy built-in pool room, it’s time to take a step back. It is easy to become so emotionally invested in a property to the point at which your whole investment strategy has been compromised. Seek advice from an experienced property investment specialist who can help to eliminate any bias to make the most informed decision on a property based off information not emotion.

Don't fear missing out

Once again, when you finally find a great property investment, you need to recognise that this isn’t your dream home. Buying a property for investment purposes is completely different and it is paramount for you to do the all the necessary research before picking up the phone. First and foremost, you as the investor need to crunch the numbers and calculate how high your maximum price is and whether this best equips you to meet the financial side of your strategy and objectives.

The fear of missing out or a sense of impatience is one of the most common emotional mistakes made by investors. In times such as now when there is uncertainty surrounding global economies amid Covid-19, investors might be overly consumed by the media and jump on the property market at the wrong time. Or even worse, pay too much to do so. Rushing into property investment will only add more risk to your investment and create more problems later on. Needless to say, there will always be another opportunity no matter what time of the cycle you choose to buy.

Don't overpay

Impatience and an overarching sense of optimism are two of the main reasons property investors tend to fall into the trap of paying too much for a property. To reiterate for the third and final time, purchasing a property for investment purposes is not the same as purchasing your dream home! We understand how telling that excitement can be, but it is fundamental to the success of your venture into property investment to recognise when this is taking charge.

Finding a lush property and quickly bidding on it to secure the purchase would be treating an investment property as if it were your own home. Overcapitalising and borrowing more than your budget allows will only worsen your debt position which can ultimately harm your financial wellbeing. As briefly mentioned earlier, there needs to be a clear and defined exit strategy for all scenarios, including worse case! Investors often neglect to consider the financial obligation of property investment and doing so, fail to prepare for this. We at Elavace recommend to all our partners an offset cash buffer in the event of such to cover at least one financial quarter of mortgage repayments—a ‘rainy-day fund’ if you prefer.

If you are an investor looking to snap up a quick buy at a property auction, this same principle more than applies here too. It is highly common for inexperienced house-hunters to be swept away by the thrill and theatrics of a fast-paced auction, which is why this is the prime environment for investors to overbid. A fresh-faced property investor filled with optimism makes a prime target for real estate agents working for their cut of the deal by aiming for at least 20% more than the guide price. If this is the market for you, be aware of your limits and formulate a clear bidding strategy.

Most importantly of all, eliminate all emotion!

Property Investment Jargon For New Investors [The Complete Guide]

READ ARTICLE

Long Distance Property Investing [A Complete Guide]

READ ARTICLE

Emotional Investing: Don't Make These Mistakes

READ ARTICLE

6 top traits you'll find in a good property consultant

READ ARTICLE

Is Property still a good investment?

READ ARTICLE