There is an old proverb that goes something like this:
When money flies out the door, love flies out the window.
It is intended to reflect how poverty can lead to strain in relationships.
However, I would adapt this in property investing terms as follows:
When love flies in the door, money flies through the roof!
I came across a blog post in an Australian property investing site that tackles the subject of property investing mixed with emotion. In fact, the post list 5 reasons why NOT to fall in love with your property investment:
- It does not have to be to your taste (as you won't be living there)
- It is first & foremost an investment (often forgotten!)
- It need not be attractive (or pretty), rather it should be easy to maintain
- You could end up overpaying for it
- You lose your negotiating power (by being emotionally involved)
I have bought two investment properties mixed with emotion.
The first used to be my home and we decided to rent it out when we got relocated - so this does not count as a 'mistake', although as I will show later it was not exactly ideal either.
The second, was a coastal property, a beautiful church conversion on the coast near an antique shop hub. This one was a property investment mixed with emotion and so was a 'mistake'.
The church conversion was offered for sale by a developer that had to trim his financial facility with his bank and so it came with a discount from it's market value. That is what initially drew me in...the lure of a discount. However, with such a unique property - what is the market value? It was hard to say, as whilst there were comparables, of course none of these were converted churches. That said, I was able to satisfy myself that the sale price was a genuine discount when compared to other 2-3 bedroom properties in the local proximity. The price also compared well to previous sales of the properties in the block of six. OK, so far, so good.
The emotional pull here came in the form of me believing we could use the property as a weekend and holidays bolt hole...oh yes the 'personal use' justification. That is what undid me here. The reason it undid me is that due to the property investing mixed with emotion or the pull of 'personal usage'. I had however, overlooked the fact that the yield (and hence cashflow) as an investment property was low by my standards. I went ahead and bought the property, putting the yield issue to one side and fully justified it based on the personal usage angle...and a dollop of discount thrown in!
Some fifteen moths later, I sold up having used the property a handful of times for the purpose intended. I had no rental income but plenty of expenses in terms of furnishing, decoration, maintenance, repairs, travel costs, legal, financial and other professional fees and of course the mortgage interest payments. To be honest, for a property investment mixed with emotion 'mistake' purchase, I did OK in the end with just shy of 10% return on investment but I was fortunate. Equally, if Robert Kiyosaki were to read this, then he would be literally screaming that an asset has to put money INTO your pocket whilst you own it, not the other way around. He is right and so my attempt to talk up this investment as a 'win' with a 10% ROI misses this golden investing rule from the Rich Dad.
It seems that I am not alone considering property investing mixed with emotion, as I see references to it all of the time on the property forums:
- Should I buy this prestigious city centre apartment that attracts footballers and Arabs but comes with a service charge of around £3,500 per year?
- Read: low net yield & cashflow due to high running costs and narrow target market
- Should I buy this [insert desirable overseas destination of your choice] property where I can use it myself for several weeks per year and save on our holiday costs?
- Read: loss of rent whilst we use the property and / or blinded as to actual rental booking levels
- Should I buy this chocolate box thatched cottage in a quaint rural village?
- Read: miles away from people, jobs, well pretty much everything really!
- Should I buy our next family home knowing we will eventually move up the ladder and rent it out later?
- Read: an overspec on the fixtures, fittings, decor, etc.
- Should I fit marble kitchen worktops, Italian tiles in the bathroom and full width concertina window / doors opening onto the landscaped garden?
- Read: an fail to realise the full value in the property in the way of remortgage value and rent levels...and run out of money for the next project to boot
It is fair to say that some of these could work out OK in the end...no never the overseas property with personal usage...but a degree of good fortune might be needed, as with my church conversion.
Knowing that property investing mixed with emotion can be a mistake and could even cost us dear, what is the best way to overcome this trap?
Property Investing Mixed With Emotion Is Dangerous...3 Top Tips To Avoid The Trap
One method is to follow this 3-step approach:
1. Only consider properties that meet a minimum set of financial metrics, such as NET yield, Return on Investment (ROI) and a minimum net monthly cashflow when rented
2. Formulate a checklist of 'must haves' in a property such as my 'STAR criteria', namely Schools (& Universities), Transport links, Amenities and Revenue (jobs and local investment)
3. Search for properties that tenants are actually looking for in large numbers by checking RENTAL listings (not sales listings) in the main portals and make sure that the average time to rent in that area is low...say 14 days
These three top tips should at least help to avoid the 'emotion trap'.
Do not do it...keep your emotions for your friends and family relationships and keep love and other emotions well away from that property investment decision...you will love the results if you do 🙂