Make sure property investing is a financial decision, not an emotional one

GUEST OBSERVATION

Whether it’s your first property or 21st, buying an investment property is a completely different process to purchasing a family home.

Buying the family home is an emotional decision-making process.

“Is the property big enough? Is that the part of town that we want to live? How does it fit in with the kids commute to school? Do we like it?”

These are all emotional questions which are very important in achieving the primary objective of buying the family home – the objective of being happy at home.

The primary objective of investing is different – to make money over the longer term. So, it’s important to totally remove all emotion from the purchase decision and to treat the asset not as a property, but a financial instrument.

The majority of investors purchase properties within 10 kilometres of where they live.  When asked why, these people often say “I know the market”. Knowing a local neighbourhood and knowing a property market are completely different. Buying locally for no other reason or with no other research than it is simply close to where we live, would be like a share investor saying “...Qantas is my preferred airline so I’ll invest in Qantas shares” – the shares have performed abysmally.

Australia is not one single property market; even Brisbane/Sydney/Melbourne have markets within their own market. With over 9.6 million properties in Australia, it is unlikely that you would be lucky enough to have ‘the best’ investment opportunity in your own neighbourhood.

Property investors would do well to adopt a business owner mindset to building and managing their property portfolio.  You’re in the business to make money through providing accommodation to people. You’ll make more money from the growth of your asset value over time than from the net rental income collected each year.

It is irrelevant whether or not an investment property resembles something that you would live in – that’s not the objective, that’s emotions clouding a financial decision. Remember that different people have different preferences for the cars they drive, the food they eat, the clothes they wear, and the type of property they live in.

It is important that an investment property has general demand from a broad market. Demand for accommodation is most influenced by affordability (the more people who can afford it, the higher demand) and where people work. Ongoing demand creates competition and price growth.

I’m not saying rush out and find the ugliest property, but we need to keep in mind that whilst an exceptionally well presented property may look pretty, it will also more often than not come with a larger price tag. The property must be structurally sound and presentable for potential tenants (that means neat, tidy and everything in working order).   

After a few years of tenants occupying a property, the shine will wear off the ‘pretty’ property with the even prettier price tag. We want a property looking its best when it comes time to sell – not when you are buying it.

Purchasing an investment property is a financial transaction; not an emotional one!

Bryan Loughnan is a buyer’s agent with Propertyology. Bryan has a Bachelor of Applied Science majoring in property economics.