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Don't Invest with Emotion

Discussion in 'Investor Psychology' started by Bryan Loughnan, 21st Jul, 2015.

  1. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    Whether it's your first property or twenty-first, 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 where 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 (particularly first time investors) purchase properties within 10km 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”.

    Australia is not one single property market; even Brisbane/Sydney/Melbourne have markets within their own markets. 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 the 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. A good investment 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!
     
    Last edited: 21st Jul, 2015
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  2. larrylarry

    larrylarry Well-Known Member

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    I'm looking at an old apartment close to our PPOR and numbers look good but there are also many new apartments being built. The old apartments seem to be tightly held. It's near the shops and there's plan to redevelop the shops. So in my case, buying a IP near me is not a bad thing because numbers look good.
     
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  3. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    You might be right Larry - but as I said, it would be VERY unlikely that the best opportunity for you is right in your backyard.

    Furthermore, investing is certainly about money - but it is also about minimising risks. I would disagree that purchasing an investment property in the same location as your PPOR is good diversification - or a good way to minimise risk.

    It would be similar to a share investor saying "I've got a diversified portfolio, I have CBA and ANZ shares" - ultimately both are financial shares and both are driven by the same markets.

    By investing in a different location you can ensure your properties are in areas driving by different economic industry drivers. Furthermore, by investing across multiple states you can take advantage of stamp duty concessions and you can also ensure that your portfolio is not reliant on one particular state government.

    I'd encourage you to keep an open mind.
     
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  4. willair

    willair Well-Known Member Premium Member

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    Depends on how big the block is and the zoning,sometimes the real money makers lie outside our field of observation,and with Banks each one is different and not all driven by the same markets,just look at the price of Gold and what's going to happen..
     
  5. larrylarry

    larrylarry Well-Known Member

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    Thanks Brian. I don't disagree with the idea of diversification. I was looking outside Sydney but this IP I'm looking at pops up unexpectedly so I went in with eyes wide open. I find this local property based on numbers and other factors stack up. I hope I'm right. Because of the Sydney market I'm open to opportunities outside of Sydney .
     
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  6. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    I understand that all Bank's are different - but I'm pretty certain it would be VERY rare that you find days that one Bank will make major gains on the share market and another significant losses (outside of days when a major announcement is made etc).

    Land size ultimately doesn't have any impact on capital growth. It will often impact your purchase price, ie all things being equal a home on a 1,000m2 block will cost more to buy than one on a 600m2 block - but this doesn't mean it will grow in value any quicker. Similarly, an apartment has very little 'land size', but again, there is absolutely no research to say that houses grow in value any quicker or slower than apartments. It varies from location to location. It depends on local supply of land releases or new apartment developments. It also depends on what the local demographic want (demand).

    Selecting a location is just one step in the process. Selecting the right asset type, selecting the right street and selecting the right property at the right price are just a few other steps in the process.
     
  7. willair

    willair Well-Known Member Premium Member

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    Over any 14-28 day period , you will see that happen,CBA s short time ago was trading above 95bucks then back into the 80 bucks range,while others I invest in like BOQ ,ANZ,NAB,and a few other state owned banks stay at the normal trends,it's a bit deeper then randomly thrown darts
    to understand the structure of randomness and market cycles..
     
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  8. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    Completely agree Willair - and we believe that investing in property markets is just as scientific as investing in the share market - just not many people realise that! What drives a property market is more than new cafes and train lines, or trendy shops!
     
  9. larrylarry

    larrylarry Well-Known Member

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    One thing for sure, the study of various investments keeps your brain working and working well into old age. :) With this particular unit as IP, I have set a value for it after taking into various factors into consideration. I foresee a steady growth but not an extraordinary one and I match it with my own risk profile. So one's investment strategy can differ greatly from another. Happy to report the progress...
     
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  10. Fargo

    Fargo Well-Known Member

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    ANZ and CBA focus on different markets. CBA is primarily for general retail and small business in Australia. ANZ is more global its main business is commercial, corporate, institutional and international banking including Asia pacific, USA, UK and NZ. Apples and oranges are both fruit but different no matter which suburb you are in.
     
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  11. HUGH72

    HUGH72 Well-Known Member

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    Nab's primarily been considered the business bank, it's share price has also underperformed relative to its peers with poor performing UK assets.
     
  12. Bryan Loughnan

    Bryan Loughnan Well-Known Member

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    For the record - this wasn't a post about the differences in Banks - it was just an analogy I was using off the top of my head to explain how an astute property investor should do as an astute share investor does and 'diversify' their portfolio.

    Diversifying a property portfolio is more than just buying in different locations though, it is different locations in different states (maximise stamp duty concessions and minimise risk and exposure to any one state government) as well as diversifying across different locations which are each driven by multiple different economic industries (mining, tourism, education, health, agriculture just to name a few).
     
  13. Jessproperty

    Jessproperty Well-Known Member

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    Yes I agree completely! We have invested a lot in the same area about 3 suburbs because we know it and the agents know us and come to us for off market opportunities.

    We had looked at other states but we are quite busy with developing we have just continued in this area.

    I am always conscious of the numbers and if it doesn't add up we are ready to leave it.

    It's amazing how many people think emotionally and won't even look at some suburbs because they wouldn't live there. It's a numbers game!
     
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  14. HUGH72

    HUGH72 Well-Known Member

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    Agreed, if a city/region is in a downturn your left holding a lot of expensive assets going nowhere fast and possibly backwards but plenty of diversification limits this.
     
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  15. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Wise words.

    Funnily enough, my first three investment properties were better than my PPOR which, in its current state, I would NOT rent to a tenant.
     
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  16. dabbler

    dabbler Well-Known Member

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    LOL....if I rent where I live, the tenant would be complaining about various things, but, I think to see some plans come to light, many will be in such a position.
     
  17. Fargo

    Fargo Well-Known Member

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    There can be different drivers in the same location, a few hundred metres can make a massive difference, some locations have all of the above. You can get a dud in any location, you can also get a gem in most locations. Yes you do have to understand the diversity of the drivers but if you get that wrong in any location. You wont go broke making a profit.
     
  18. Chilliblue

    Chilliblue Well-Known Member

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    Bryan, as BA, where do you see potential capital growth areas?
     
  19. Bayview

    Bayview Well-Known Member

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    One thing I've always tried to do is think about where the IP is located from the tenant's mindset.

    Most humans want to have their place close to all the cool things in life, and in a nice property with a sensible floorplan and so on.

    So, first criteria for me has always been where in the suburb to buy...narrow down the target area to a few streets.

    Then the best of those streets - streetscape, property style and conditions around it and so on.

    Then the property that is going to be most attractive based on the demographic in that area - not much point buying a 3x2 house on a 1000sq/m block set up if all the local renters are likely to be students, or a studio when all the renters are families.
     
    Last edited: 23rd Jul, 2015
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  20. Bayview

    Bayview Well-Known Member

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    LOL! Our first IP cost more than our then PPoR.