Most property investors will tell you that you should make unemotional buying decisions and rely on “the numbers” when buying an investment property. Yet when we see them in action we still see so many reactions to property that are based on emotions rather than rational thought. But is this such a bad thing? The secret in knowing how to avoid emotional investing lies in understanding the role emotion plays in the decisions other buyers make as well as your own.
If one of your primary goals is capital growth, then emotion plays a very important part in selecting an investment property. The key to capital growth in real estate is resale value. It stands to reason then, that if a property only appeals to unemotional investor buyers, then it is unlikely to generate competition when it comes time to sell it. And competition is what drives up prices. It’s a paradox: how to avoid emotional investing is by looking for investment properties with owner occupier appeal. So if you are having an emotional response to a property, there is a fair chance that the property possesses the characteristics that will appeal to many buyers, not just one.
The ideal investment.
Of course you need to be very careful that you don’t get carried away with this emotion and compete too hard yourself! Knowing how to avoid emotional investing means knowing when to walk away. As an investor it is important that you do your price research and understand what your cut-off price will be. If the property is going to auction, this could be one to try to buy prior – make your offer strong enough to entice the vendor to sell before their big day, but less than the price you suspect it could reach under competition. If another buyer pays more, then so be it. Move onto another prospect.
Buyer blind spots.
One thing to be wary of is that pretty much all of us have blind spots when it comes to real estate. I have one and my colleagues love to rib me about it – I have this thing with trying to buy in streets or buildings where I have lived before. It must have something to do with all my fond memories! But each time I seem completely blind to the drawbacks of each property and I get a bit carried away until I consciously open my eyes to the negatives.
Back in 2012 this happened three times. First time was a ninth floor apartment in a well regarded building in Darlinghurst. I misspent some of my 20s renting the apartment directly above… It did end up selling for what I felt was a very reasonable price, which even to this day bothers me a little. But the reason I decided not to go for it was the fact that there were some unresolved water issues with the roof and the worst case scenario was that it could end up costing hundreds of thousands of dollars to rectify. And this would have meant ongoing special levies, which have a dampening effect on capital growth (not to mention cash flow!)
The second time was another property in Darlinghurst. This time, a tiny cottage on a tiny block of land in a tiny little lane. When I lived a few doors up in my late teens it felt like an oasis in the middle of a busy, noisy city. I loved it then and it still has the same feel. The house in question needed renovating, which I am not scared of, having done a few before. The deal breaker for me, once I took my rose coloured glasses off, was that one of the things that makes a build expensive is access costs. With such a narrow lane, how would building materials be delivered? Can trucks get in easily? Where would a skip bin go? So reluctantly I passed on this one. My consolation in this case was that at least it sold for more than I was prepared to pay!
The third time was a terraced shop front located a few doors up from my office. Part of me still wishes I had bought this one. But I am also certain that the limitations of the property would bug me now if I had. I could see potential to relocate my office there as well as create an upstairs apartment to rent out. One of my team members helped open my eyes to the issues with this property. It was heritage listed, so any improvements or alterations may not be straightforward. But she also reminded me that it’s location almost adjacent to one pub and opposite another would have a negative impact on capital growth. Despite my somewhat “romantic” desire to own an old shop (which I have often felt would be cool), this property would not necessarily make a great investment.
I did end up buying an investment property that year. And it’s not in a street or suburb in which I have ever lived. Nor is it an old shop. It is a semi detached cottage in Alexandria that was dated but very lovingly maintained with lovely original features that were overpowered by the blue shag pile carpet and matching striped wallpaper. Due to the circumstances of the sale I was able to pick it up for a very reasonable price (comparable sales at the time showed me that) and spent a minimal amount of money and time sprucing it up before renting it out. By polishing the floorboards, changing light fittings and repainting it a contemporary colour I created more of a “feel” that will no doubt attract an emotional buyer when I come to sell it.
And that really sums up the ideal investment. One with the potential to create an emotional response in buyers in the future. I think emotion is something that must be taken into consideration when buying a property. Because people prefer to live in properties that they like, whether they are renters or owner occupiers. So, how to avoid emotional investing? You need to identify which emotion is peculiar to you and which is likely to be shared by the majority of buyers.
First published: 7 April 2014
Updated: 28 March 2018
Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.