I recently read a MarketWatch post detailing the biggest mistakes retail investors make. It got me thinking about real estate investors. Do they make any of the same mistakes? Yes. And a big one is emotional investing.
Real estate investors are just as susceptible to emotional investing as their stock market counterparts. When they are riding the emotional high of a good return, they are more likely to invest in new properties. The opposite is also true. Unfortunately, emotional investing does not take into account the realities of making money in real estate.
Real Estate Is a Long-Term Strategy
The most important thing any new real estate investor could learn is that putting money into real estate is a long-term proposition. Even investors who choose to go the fix-and-flip route make their money over many years of investing. It is the nature of the beast.
Fix-and-flip Investing
It’s tempting to think of fix-and-flip investing as a short-term enterprise. It is, but only in the sense that a successful investor will be flipping properties every few months. But the overall scheme is still a long-term one. Why? Because of the natural flux built into residential real estate.
Some properties prove real winners for the fix-and-flip investor. Profit is maximized, and he walks away very happy. But other properties don’t do so well. They either do not produce the anticipated profit or barely break even. Some actually lose money.
Fix-and-flip has its highs and lows, its ups and downs. Over the long term – think many years here – a successful fix-and-flip investor should do very well. But in any given year, he might not.
Rental Property Investing
If an investor is not involved in fix-and-flip, then he is looking at properties that will generate monthly rental income. It is easy to see the long-term potential in this type of scenario. The longer an investor holds a property, the higher its total return could potentially be.
Initially, a property’s rental income should at least cover monthly loan payments and carrying costs. As the investor’s loan is slowly paid down, equity increases. The property eventually becomes a profit-generating machine with a clear title. From that point forward, equity only increases.
It can be tough to make good money on a single property using the rental strategy. But one property becomes leverage to acquire a second property, then a third, and so on. Over many years, this sort of strategy can produce a sizable portfolio generating a significant amount of monthly income. And when the investor is ready to sell that portfolio, the total return could potentially be huge.
The Impact of Emotional Investing
The experts at Salt Lake City’s Actium Lending have seen firsthand how harmful emotional investing can be. They have worked with clients hoping to get loans on properties that would be considered questionable by more seasoned investors. Actium has also seen its fair share of investors turning down very good opportunities out of unwarranted fear or caution.
Emotional investing causes an investor to ride the rollercoaster of ups and downs fueled by a 24/7 news cycle that always has both good and bad news to offer. But that is no way to make money in real estate. Instead, it is better to establish a plan with solid targets in either direction. Then stick with that plan regardless of how the news cycle effect once emotions.
Investing based on emotion is a bad idea, regardless of the targeted asset. But in the property market, it’s especially concerning because it can hold back an investor who would otherwise do very well.