One of my mentees, Bob, recently found a wonderful investment property and he was eager to make an offer. This home reminded Bob of his childhood home, so he was keen to make the acquisition. After all, our local market is ripe for investors right now—or at least that’s what he’d read in all the newspapers. Bob, along with everyone else riding the market, felt a sense of shared euphoria and a strong desire to buy, buy, buy. I’ve seen this urge time and again as a HomeVestors® Development Agent and mentor for newer HomeVestors® franchisees. And I have to gently urge them to refocus, finding a slightly different frame of mind. Successful real estate investing requires logic-based decisions rather than risky emotional ones.
There’s a certain psychological effect that inexperienced real estate investors get caught up in during market highs and lows. As the market trends upward, initial reluctance turns into optimism and even exuberance. The market feels irrepressible and everyone hops on the investing bandwagon. In some cases, this creates a bubble, following a market downturn. Then, investors are first hit with denial, which ultimately evolves into desperation, and, finally, a “sell-everything” hysteria. Remember when the 1997 housing bubble burst? Intense fear prompted investors to toss aside their long-term strategies, limiting their field of vision to short-term solutions. Emotionally and financially exhausted, investors eventually capitulate and the market evens out. That is, until they encounter another period of uncertainty.
Mistakes that Investors Make and How to Avoid Them
Going along with the market’s temperamental upswings causes overconfidence for new investors. This leads to underrating the importance of due diligence, along with poor decision making and a reduction in activities designed to build solid supports. Let’s take a look at some of the common emotional misjudgments that investors can make when selecting a property during the inevitable ups and downs of the market.
- Failure to recognize your fear of missing out. When everyone and their brother seems to be buying, it’s tempting to join the fray. Sometimes a property is just not a good investment regardless of what the market is doing.
=> Instead, employ tried-and-true valuation tools such as ValueChek® to ensure the property has the potential to bring a solid return.
- Growing impatient during a property search. You’ve followed through on lead after lead, yet you still haven’t found the right investment opportunity. It’s easy to get over-eager, with many investors becoming convinced that a particular property is “right.” Overpaying is inevitable in this case.
=> Instead, put that wallet back in your pocket and focus your energies on better investor lead generation strategies.
- Choosing a property based on trendy amenities. Sure, it might be popular to have a hot tub on the deck or a fireplace in the bedroom, but you won’t be living there and these amenities do not necessarily add value to an investment property. If a buyer wants those extras, let them spend the money to customize according to their own tastes and desires.
=> Instead, price out all renovations carefully to ensure each project is worth the expense.
- Listening to the wrong advisors. Everyone has an opinion and they don’t hesitate to share it. From friends and family to investing “gurus,” it is best to avoid getting advice from individuals with limited investing experience, “gurus” with advice that conflicts with all other recommendations you’ve received, or people who simply aren’t familiar with the industry.
=> Instead, surround yourself with other experienced investors who know your unique goals and market.
- Failing to stick to your investment plan. Of course, you need a proven strategy and the best marketing tools for investors in the first place. But, the follow-through is critical for making sound business decisions in any market.
=> Instead, focus on streamlining your own processes to avoid becoming overwhelmed by the market noise.
Emotional Divestment is Key to Logical Investments
Investing in real estate is far more emotionally complicated than many other jobs. It’s not like you’re using stockholders’ monies to fund a corporate supply chain. It’s your business and your money. Jumping in head first, without logically evaluating all aspects of a potential property purchase can cause significant financial damage, while also harming the overall viability and well-being of your real estate investing business. When you begin to feel emotionally involved in an investment decision, it’s time to engage proven tools and resources. A network of experienced mentors, such as HomeVestors® franchisees, can help refocus your strategy so you don’t lose sight of your primary objective. Get in touch with HomeVestors today!
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