How Psychology Affects Property Investing

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Expert Advice by Paul Wilson
06/09/2012

Warren Buffet said, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

On the surface that all sounds so easy doesn’t it, but in reality it is a lot harder to keep your emotions in line during times of negative activity.

Regardless of the point you’ve reached in your investing career, your investment psychology will be playing a role in how you approach your wealth creation.

Getting a Risk Tolerance assessment at this stage is not a bad idea because it will show you what your real attitude to money is and how you feel about risking your money in investments.

When you have money in the bank, you most likely feel that you have a high risk tolerance but when it comes down to your money actually being threatened then that attitude can change quickly and dramatically.  This is why it is worth doing a risk assessment.

Anyone who suffers from a low risk tolerance may find it extremely hard to make a decision to buy.  I am sure you’ve heard of people who just can’t make the decision to buy.  They have the funds, they say they are keen to buy, they look at every house that falls within their price range, but at the end of the day they just can’t go to contract. Why? It is because their fear is stopping them. They find one excuse after another to not purchase.

Once you have invested your money into real estate when you have a low risk tolerance, you may find yourself incessantly worrying about whether the property is dropping in value and if you’re going to lose money.

The point is, whatever type of investing you do there will be some market noise. That means that the value of your investment dollar will move up and down over time.

Take the 2008-2009 market crash.  Many people lost as much as 50% of their overall investments in real estate and/or shares and instead of trying to sit that out they panicked and sold out at a loss. (In saying that, I do realize that often it was not their decision but their lenders.)

But this emphasized the fact that, even when you think you have control of your emotions and can withstand the ups and downs of the market, when the crunch comes, you may not in fact, be able to handle the emotional turmoil.

Let me start of by saying this is not a risk assessment test in any way but I would like to put to you some thoughts to consider and to take into account when investing in property:

  • How much risk are you prepared to take?  In other words what are you prepared to lose to build wealth in the long term?
  • Are you prepared to borrow the maximum amount?
  • Can you buy with your head and not your heart, leaving all emotion out of your purchase?
  • Are you prepared to manage your investment or do you expect to purchase and almost forget about it hoping it will produce the results you desire?
  • Can you invest for the long term from an emotional point of view?
  • Are you prepared or can you accept the worst-case scenario?

So understanding the fact that perhaps we don’t truly know our investment psychology and find that we are not buying when we know we should, let’s look at some steps that can help when buying investment properties but also make you feel that you are financially secure.

  1. Make sure that you have a solid buffer after you have purchased a property so that you can pay for any unforeseen circumstances that may arise, this is an amount that only you can decide on to make you feel safe.
  2. If you have a low risk profile, target properties that don’t need renovation so that you will feel comfortable with the fact that you don’t need to outlay any extra money.
  3. Buy in an area that has high rental demand and little risk of property values falling, e.g. CBD’s, near water or long established commercial ventures.
  4. When obtaining finance structure your loans so there is a clear separation between your own home and your investments.

If you take these four steps and use professionals with property investing experience then you will be well on your way to building your property wealth.

Paul Wilson is an Independent Property Investing Expert and the founder of We Find Houses, Educating Property Investors & We Find Finance. Paul has been educating and coaching investors since 2001. Paul provides valuable, independent guidance and support by teaching strategies on how you can invest successfully while protecting yourself from commission hungry sales agents and property spruikers. Protect yourself with knowledge, contact Paul today for a complimentary consultation on 1800 600 890 or email paul@wefindhouses.com.au

To read more Expert Advice articles by Paul, click here

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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Comments
  • We Find Houses says on 14/11/2013 04:57:36 PM

    Paul Wilson will be happy to answer your questions through this forum thread!