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7 Common Property Investment Mistakes You Are Prone To Make
Other than spending too much time fingering apps on your iPad, the biggest hurdle you have to conquer for making the right decisions is yourself.
While it can be a great elation when you find out that property prices and rental rates are growing like Jack’s Beanstalk, the misery can be really hurtful when your investment property is not paying off like how you expected.
It is therefore a little sad that we tend to repeat robotic mistakes again and again even though there are countless real-life case studies for us to reference. Mistakes are often caused by emotions and here are the most common shortcomings that we prone to when investing in properties.
1. Your fat ego
Yes. You are the best around and nobody knows anything about property investing except you. You ignore the prudent advice from your mother while you make fun of opinions from experienced property players who are trying to knock down your front door. You know best and you truly believe you are one deal away from being the next Donald Trump.
You have to wake up and smell the milky coffee. You could be as knowledgeable and experienced as anyone around, but have you heard of the Chinese saying 一山还有一山高? Over-confidence is something that can knock you off that pedestal with one single blow. Investment scams also target those who are too confident with themselves. They are easy prey as they think they know everything and neglect doing property due-diligence on investment deals.
Confidence in investing comes from having reliable and credible information and make decisions based on that information. Yes you might have a hunch. But how do you know if that is a sign telling you to throw in your money or just your stomach telling you that the Tom Yam soup lunch is too spicy?
2. Overzealous acquisitions
Success breeds confidence. But just because you made a huge windfall from your last property does not mean that you have now become the high profile investor with the midas touch like Oei Hong Leong. You start buying up everything you see that matches your investment criteria on the surface.
Having too many projects on hand means you have less time for each one. And having numerous properties also means that your costs multiplies. Things like closing costs, exposure to interest rate fluctuations, renovations, etc, can often be overlooked as you have your eye on the end product. It is better to have one big winner than 10 average performing properties.
3. Monkey see monkey do
The saying that “successful investors enter when no one else dares and exit while everyone buys” has been around for years. This is as profound as any of the quotes from Confucius. The irony is that people continue to follow the crowd even though they are aware of this well-known quote of investment wisdom. They chase whatever is hot at the moment. From residential apartments, to commercial offices, and then to industrial properties. If you are doing this, sit back and ask yourself what is it you are trying to achieve here and review your investment objectives.
When others buy, you buy fearing that you will miss the money wave. And when others start to sell, you hold onto what you have as you have absolute faith that things will pick up again. If you fail to respond quickly and sell at a profit, you would arrive at a point where selling would mean accepting a loss. So you might as well hold onto you depreciating property so that you can live in denial.
Bubbles are created from market hype. History has shown this to us again and again repeatedly. Yet we are often blinded by easy money when buying in exploding markets. In fact, many investors who pump their hard earned money in bubbles are fully aware that it could burst at any time. But they are very sure that they would have already exited the market by then. Before they know it, exiting circumstances have changed.
4. Inside information from your friend’s uncle’s colleague’s army storeman
If you want to see how rumours can cause billions of dollars in value fluctuation. Just take a look at the stock market. Good and bad news can cause prices to skyrocket or tumble within a matter of minutes based on unfounded rumours alone.
Rumours of city planning or redevelopment works can make a $1m property look like $2m. Before having a sudden urge to take action and snap up a property based on “insider” news from a source that cannot be verified that it exist, you have to ask yourself if your investment strategy is one that includes acting on rumours. Because the last I’ve checked, investments are made by calculated decisions based on information and market data.
5. Emerging market investments
The catch-phrase “emerging markets” started to enter everyone’s dictionary when unit trusts was the hot ticket years ago. Now property marketers around the world are coming to Singapore to take your money to another country with emerging markets with huge potential.
Remember that emerging markets take years or even decades to realize it’s potential. This is assuming that government plans for them remain the same or are improved upon. By the fifth year of your investment, your broker could be gone or your property was never completed as the developer has gone bankrupt. Hey even a contractor for Rivervale mall in Punggol East can go bust. This can happen anywhere.
6. Using profit to top up losses
Yes you are managing a portfolio of properties. It is your overall portfolio performance that really matters. So you take the profit from your best property to mentally write off the losses of your worst property. But as you hold onto your losers, they tend to lose ground even more. Eating into your profits like a cash parasite.
Learn to cut off losers without remorse. There is only so much time you can give to a loser to turn around. A 16 year old footballing prospect has only so much time to show progress to his true potential. When he reaches a certain age without signs that he is progressing, the football club would let him go. No hard feelings.
7. Value investing
As a property investor, it is your job to seek value buys. This does not mean that you buy the ones that are most affordable to you. An affordable apartment is not the same as one that is a good value buy. The best way to quickly see if a value buy is indeed good value is to work out the price per square feet. Then compare that with recent transactions in the area. Are you buying at a considerable discount compared to recent transactions? Other factors can also be in play.
Home owners are not clueless. They know how much their properties are worth and there must be a good reason why they are selling below market value. It could be that major repairs are needed. Ask sellers why they have arrived at their prices. Usually they will be upfront of the problems but will not reveal the real costs they know that has to be spent.