Get The Right Investment Property Mindset

A number of my clients are working towards the purchase of their first investment property. They may be adding an investment property to their existing home or the investment property may be their first foray into the investment property market. Whatever your journey to this point, it’s important to make sure you are in the right mindset, before you start looking to buy.

Investment property – the problem of too much choice

When you set out to buy a house to live in yourself you quickly rule out a large number of properties based on your own preferences and needs.  You know where you work, whether public transport is important, whether you want a garden, how many bedrooms you need, whether schools or shops are a consideration and your general gut feel about whether you like the place.

Buying an investment property doesn’t start with these constraints. You don’t need to worry about the two bedroom house being too small for when you start a family. Renters will decide for themselves if the size meets their needs right now. The property will attract those people looking for a two bedroom house. So provided you pick a reasonable property and don’t pay too much for it, it shouldn’t be that hard, right? Wrong – the human brain is a funny thing.

Studies in behavioural finance (the psychology of how people make financial decisions) tell us that when there is too much choice the human brain finds it very difficult to cope. Either it feels so overwhelmed that it shuts down, and you walk away deciding that the whole process is too hard, or you find some short cuts to help narrow down the number of options available.

Some of the more common short-cuts to narrowing down the options to consider are:

  • You look in the area you already live in
  • You search for properties and locations that you secretly aspire to live in
  • You try to match your property to the investment property of a friend’s
  • You look for a property that you want to holiday in, or retire to
  • You find a single property that for whatever reason you fall in love with and then fixate on that property or something that closely resembles it.

Obviously the last is not a great idea, the others are a little less clear cut. These strategies can be effective in reducing the number of options you have to consider and decisions made this way don’t always work out badly. Buying in the area that you already live can be helpful because you already know a lot about the location, the good and bad areas and what is going to be important to the types of people that want to live there. Unfortunately though, only relying on these strategies increases the chance that you get overly emotionally involved in the purchase decision and paying too much for a property or missing out on some really good opportunities that might make for a better investment. Next month we’ll feature an article covering what to look for in good investment property, but before you even get there you need to remember one thing….

This is your Investment property –you are NOT going to live here

The hardest thing to do is to remember you are not going to live in this house. It sounds so simple but most of us do still struggle to separate our home aspirations from the financial and practicalities of an investment property. It is worth acknowledging that this is especially hard if this is your first house purchase. It is fairly universal to feel a longing to buy the lifestyle that you aspire to, and a sense of disappointment if the property that meets your investment goals doesn’t quite meet this vision. We regularly discuss with clients how to reframe this decision in our own minds. While this is a residential property, this is not YOUR home, this is your INVESTMENT. If your purchase is your first toe in the property market, and you feel a little disappointed that it’s not the home that you imagined, then think about it as a place holder in the property market and a vehicle to get you to where you want to go, not a destination in itself.

You will get seduced from time to time

If you find yourself feeling swept away by a particular property, acknowledge it, but be a little kind to yourself. Residential property is seductive, the ability to touch and feel a lifestyle as you walk through a house is highly emotional and part of the reason real estate agents make such a good living. See it, feel it, then move on. Let the emotional seduction move the residential buyers following you in the door. Let them pay more than they should on the latest kitchen or perfectly presented indoor-outdoor living area, you’re on a much more targeted mission, a search for the ugly duckling to provide you with good quality reliable capital growth and income.

What next?

Now you’ve got your head in the right space you can start to consider where you are going to buy and how much you can afford to spend. More on those topics to come.

 

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Finance Women Pty Ltd ABN 86 601 109 960 (Corporate Authorised Representative number 1000187) and its financial planners are authorised representatives of Dover Financial advisers Pty Ltd. AFSL 307248. This document has been prepared for general information and education and not as specific advice for a particular person. You should seek professional advice prior to acting upon any recommendation or other information contained within this document. Alternatively, you should carefully consider the appropriateness of the advice in light of your personal objectives, financial situation and needs. You should also obtain and consider the Product Disclosure Statement before making any decisions in relation to a financial product. The information contained in this document has been taken from sources believed to be reliable. Although every attempt has been made to verify the accuracy of the information contained in this document, liability for any errors or omissions is specifically excluded by the Licensee.”

 

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