They either have a property or properties in their portfolio they’re reluctant to part with because they’ve ‘fallen in love’ with them or as a result of a deep sentimental attachment with the stock – it was once the family home, it’s in the same street or suburb as a family member or friend, or it was built and designed by the investors themselves.
They’re also often concerned that the dwelling they’ve held so dear to their hearts may not be viewed in quite the same light by a potential buyer.
Although the majority of investors are well aware of their unwise attachment, they’re happy to eschew capital growth and solid rental yield in the hopes that one day the property will finally perform.
Sentimentality gets in the way of why they’re investing in the first instance, which is to build their wealth and future security or that of their children. Sadly, the fallout from this attachment is that the performance of an entire portfolio will be dragged down by one or more non-performing assets.
While PPA’s findings show that 50 per cent of new investors suffer from this imprudent affection for property in their portfolio, all investors are liable to fall into the trap.
This is not surprising given the sheer size of the asset and the amount of money investors need to borrow to purchase property, particularly in Australia where median prices can be eight or nine times the annual income of the buyer.
It is often easier to turn a blind-eye in the hope that things will turn around. Sadly, we know from experience that time only magnifies mistakes.
How to side-step the problem
For those of you who are serious about making money from your property investments, here is how to avoid becoming overly attached and how to unshackle yourself if you already are:
View property investment as a purely financial undertaking. Do the numbers stack up? That is, are the properties in your portfolio achieving a capital growth of six to eight per cent per annum, basically outperforming the Australian average? You need to apply the same hard logic you apply to your share investment portfolio. A critical component of building a successful property portfolio is to ensure short to medium-term (two to four years) capital growth from each newly acquired asset. If you are buying only for the long-term prospects, then building a portfolio is going to require significant additional personal income and capital. If your properties aren't performing in the short to medium term, you should seriously consider selling and replacing them with assets that will give you accelerated equity and enable you to accrue the next purchase faster. The only reason for holding on to a property that isn't performing is because you plan to live in it at some stage or turn it into your holiday house.
Get a professional to inspect the property on your behalf. Before making an offer, it is absolutely essential that your investment advisor or someone you trust visit the property and inspect it for faults, such as structural building issues and pest control. Also have them determine there are no issues with neighbouring properties. Being close to apartment blocks, schools, transport corridors or busy commercial areas could mean heavy traffic, noise and privacy issues that can affect capital growth.
Get a professional to purchase on your behalf. As unconventional as it sounds, ideally purchase ‘sight unseen’. This not only prevents you from falling in love with your purchase or purchasing on gut feeling, but opens up your search options well beyond the city you reside in to every capital city across Australia. It also enables you to make decisions based on your financial circumstances rather than being swayed by unimportant things like aesthetics or 'wow' factor marketing. Basically by not viewing the property, your decision is based on true investment potential. If you’re working with an investment advisor, they will provide you with photos as part of your property report, which will at least give you a glimpse of your acquisition but without the perils of you falling for it.
Ensure your portfolio is reviewed on a regular basis. This forces you to be much more objective about how your properties are performing, compelling you not to disregard poor performance because of subjective bias.
Never purchase at an auction. The purpose of an auction as a sales tool is to generate stress, emotion and momentum with bids from a visible market of buyers. This ‘hot’ state that buyers are subjected to results in irrational decisions, ego, competitiveness and impulsiveness – eventually you're left feeling remorseful you've spent more than you budgeted for.
Apply the sleep test. Don’t make a decision to dispose of or purchase a new investment property until you've slept on it. This takes the impulse out of buying.