There are plenty of mistakes that novice property investors make that can derail them.
These can range from simply buying the wrong property for the wrong price to not having any rainy-day money in their kitty (a buffer).
However, here are three mistakes which are a little more tricky to overcome because they are to do with our emotions, our mindset and some irrational thinking.
- Buying in their backyard
Many beginners try and make their favourite strategy “fit” in their preferred investment location – whether it is appropriate or not.
This is a bit like trying to put a square peg in a round hole.
It’s important to understand that the location of your investment does the “heavy lifting.” It will account for around 80% of your property’s investment performance.
For success you must of course also buy an investment grade property in that location.
Yet many investors prefer to buy in their back yard because it’s their comfort zone. They feel they know their “market.”
But that’s not really true.
Knowing your neighbourhood is not the same as understanding the property market – in fact it’s very different.
So rather than buying close to where you live, where you holiday or where you want to retire, which are all emotional reasons for selecting a location, select your investment location based on research.
Look for an area that has a long history of outperforming the averages, and one that is likely to continue to do so because of the demographics of the people who live there.
Demographics is one of the biggest factors determining capital growth and I’ll explain a lot more about this in another rule.
Statistics show that some suburbs have 50 to 100% more capital growth than others over a 10-year period. Obviously, those are the suburbs to target.
- Being too emotional
I’ve said it before: sound property investment should never involve emotions.
It must be based on rational decisions and not one where your heart is leading your head.
Too many beginning investors choose properties that they fall in love with.
Perhaps they have a penchant for homes with a particular character because it reminds them of their childhood.
Now that is a lovely way to reminisce, but it’s not a smart way to make money!
Again, you must understand the demographics of an area, to ensure you only buy the type of property that will be in consistent strong demand from the types of people who want to live there.
- Being part of the crowd
While being amongst a crowd might be fun at a concert, it’s not the way to make solid property investment decisions.
Following the crowd into a particular location because you have a bit of FOMO (Fear Of Missing Out) will often result in you overpaying for a property in a market that will flat-line once the “madness of the crowds” has disappeared.
The average investor is not really the role model you want to follow. Remember, most investors never get past owning one or at the most two investment properties.
On the other hand, strategic investors who adhere to a robust strategy which has stood the test of time understand that it doesn’t matter whether their Great Aunt Matilda agrees with what they’re doing – unless she is a property expert herself.
If she isn’t, then they must rely on the team of property professionals they have gathered to provide them with the very best advice.
The only time that Lemmings are funny is on the television. You certainly don’t want to be one when it comes to property investment.
The bottom line:
We like to think we make rational decisions, but often we don’t.
Mindset and emotional mistakes are a threat to us all because we are all human.
But that doesn’t mean that you can’t learn to control them.
There is a whole science of Behavioural Economics which tries to teach investors to make more logical and unbiased decisions which ultimately will mean that you’re not one of the buyers left crying over their bank statement when a “hot” market suddenly goes cold.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.