Emotions in property investment, is that necessary?

Are emotions in property management really necessary?

Most investors think that the best investments are made without emotion. Is this true? Let’s dive in.

A good property investment purchase is measured by the equity and cash flow risk. 

This comes into practice if you are going to accelerate excellent returns in the next 7 years and double or triple that in 20 years. Also, you will be able to maintain a consistent monthly cash flow to cover all property outlays within 5-7 years to increase cash flow stream and create a single stream of income. This base of cause on the property growth and if the rental income will follow the property value growth.

When you have equity growth and cash stream monthly, you know the investment was right.

To purchase investment property, emotions and intuition must work as well.

Attractive houses that are in excellent condition, renovated, have a beautiful spacious garden, extraordinary layout, and a reliable location provide a type appeal that attracts you emotionally. Families are happy to pay a top dollar for this type of house and willing to go above their budget to make it work out.

Only numbers can do well, but the actual dwelling characters will make a large proportion of investors to come to a buying decision.

This is not the best psychological way of going about it. Although as humans, we tend to lock something in our minds – despite a location or however high the numbers may be, we still will desire to have it.

We always must combined numbers, risk and returns first before going to the next step.  Emotions are first to come up in our decision making process, but we must push these to the latter part of the process to make a smart and analytical decision.

Most of the real estate advertisements efforts are to elevate buyer emotions – using beautiful photos of spacious rooms that are spotless clean with spectacular lighting. The issue is, most of these images are not realistic of how families actually do live. Even in reality if the property is small, ugly or located on the main road, it is portrayed as coming right out of a magazine – showing a minimal design in the pictures with a clean house, and a nice description with overwhelming words that are hard to pronounce.

Even Property investment firms try to increase the buyers’ emotions by focusing on large attractive buildings that look amazing on the brochure, with the robust infrastructures that will be ready in 20 years. This strategy is to elevate our emotions, with the effort to build a dream. For example, showing a beautiful swimming pool that occupies the entire 50th floor and a glass bottom, allowing you to look through the glass all way down to the street level. Also, a luxurious lounge is shown on the same level as the pool, giving an image of the best place to relax that everyone wants to be a part of. Not only that, the Bentley, Mercedes S-class and Austin Martin are displayed in front of the lobby entrance which attracts you into the illusion that one day you can have that – a dream that everyone aspires to achieve.   Most of these emotional sales tactics are not based on accurate figures or facts, just giving its audience a strong perception that one day in the future their property will grow and they will be very wealthy.

These type of tactics (especially in off-the-plan), utilize hard sales without any risk base, only emotions.  There are good Off The Plan or first hand completed products that on in-demand locations can be a good purchase, however, we need to be very cautious about allocating our hard earned dollars with this methodology.

Instead, per investment, the approach would be better if we remove emotions from the picture and instead use a more analytical approach based on numbers and risk analysis. This is how you get it right.

The issue for most people is that if they decide to do it themselves, their lack of knowledge may lead them to an appealing ad online. This appealing ad leads you to a subpar sales consultant that may use pushy sales tactics (intense emotions, scarcity, etc) to buy just an average product in most cases.

Often I hear real estate sellers and builders saying “What’s the matter? This is an only investment property, just buy it without emotions and wait for future growth opportunities. Don’t look at the appearance of the house, the paint, the facade, the size or the layout.  Just buy and wait, as this is an investment, you have an excellent rental yield, that’s it”. While this can be satisfactory for some of us if the numbers and risk are right, this is often said to just push sales of average quality.

So what we do then?   Do we buy with emotions to attract owners OR treat it as a figure only?

In my early days, I often got too emotional on the property selection stage. When the sale advisor showed me the “best property in the world” that while looked fantastic, they tried to justify my decision with BIASED data that wasn’t so relevant to the property. But when you start your own investment journey, you get to make your own decisions that won’t fall victim to fallacies and biases that other sale advisors may put on you. Before, I just wanted to be in this dream that was too good to be true, and as a result, I made a few wrong emotional purchases.

Many companies provide news that is not related to the property itself in order to increase investment emotions even in weaker markets such as Adelaide or Perth. The Adelaide government example proposed that the most extensive virtual solar panels will connect to new homes, regardless of the fact if the specific property or project is on or off the market. This news won’t change the equity risk in this particular market or with any luxury apartment in the CBD, or even a beautiful established house for that matter.

The new plan to “improve connectivity in SEQ that might increase the economy by 58 billion dollars by 2045” will is a phrase used commonly by marketers to try and increase the buyer’s emotions. Sadly, this will increase the company sales revenue but not investor’s equity. SEQ, in general moves slowly, excludes few spots obviously that are running fast, and you are likely to end up with an excellent real estate product (on the surface) that won’t give you the returns you are looking for, until perhaps the long and distant future.

Most of the luxury real estate market doesn’t relate to owner-occupiers.  Families looking for excellent school catchment are prepared to pay top $$ to enter the suburb with a lovely property that is well suited for their children’s needs, their needs, and just give them a superior quality of life.  However, today new developments or new estates are mainly investor products, which are promoted in such a way to appear as owner-occupiers’ products which attract a lot of investors to by into this “dream”.

I found the solution – and it’s VERY straightforward  

You MUST make sure you:

  1. Understand your budget (must be a number or a range that can’t be higher than 2-5% difference)
  2. Run a risk analysis on the property, a preferable district or based on the entirety of Australia.
  3. Make sure it’s from an independent source.
  4. Go the risk-returns’ output where you get to the field and select your property on the selected suburb.  The risk management and the buyer advocate will give you proper guidance in terms of which property to inspect, which will have the potential to attract more capital growth and more owner-occupiers in the future. Then, the risk analysis algorithm will factor-in, in-demand suburbs, preferred asset class and property configuration. With this output, you have done 60% of the work. Next, it’s time to check the condition carefully, if the agent is reliable, and if the real estate position is on the ground, layout etc.   At this stage, if emotions are on the rise, and it will add more value because you will have picked a property that you would have desired to live amongst many others.
  5. If the risk is low, it means a greater likelihood for higher returns. The higher the balance between equity and cash flow risk, the better the property and the better the profits & growth value. The more superior the property that you choose will increase your emotions will add extra value to your investment. Do it in these steps to ensure you do not buy property strictly based on emotions, and rest assured you will get the best one!

We can’t wait to start working with you to increase your wealth!