Two-thirds of property investors make the mistake of buying in their own backyard.
Now we know that most property investors never achieve the financial freedom they’re looking for.
Of the 2.1 million property investors in Australia, 1.9 million never get past their first or second property while only around 20,000 investors around Australia own 6 or more properties.
A while ago a report published by University of Tasmania economics lecturer Dr. Maria Yanotti and University of Sydney finance lecturer Danika Wright found that two-thirds of Australians buy an investment property picked one close to where they live, rather than in another location that could outperform their home town in the long run.
Dr. Yanotti said:
“The explanation for that home bias … is a familiarity bias, lack of sophistication, knowledge or education and momentum behaviour.”
But there was no evidence that location familiarity gave these buyers an information advantage.
As I’ve often said, knowing your local area is not the same as understanding the dynamics of the local property markets and understanding what does or does not make a good investment property.
Sure proximity is an opportunity for property investors to cut down on time and effort, but to become a successful investor does require time and effort – but maybe not yours.
That’s why more and more investors are turning to buyers’ agents who have more widespread market knowledge.
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Another interesting, but scary, statistic that came from this report was that one-fifth of investors were self-managing their properties.
Now that’s a recipe for disaster in my mind because employing a proficient property manager is not a cost, it’s an investment and a form of insurance to protect your asset.
Not a good idea
I’m sure these investors who bought locally and putting all their eggs in one basket thought they were doing the right thing because it felt safe, but Dr. Yanotti said:
“The problem is housing assets are one of the biggest assets …By having all your assets in the same geographical location, the risks are much higher.”
The report also found the inclination to invest in property close to home meant investors were paying a lot more to own a second or third property in the same postcode.
“We found, to our surprise, that investors who invest in their own area pay much higher prices, although we don’t control for the quality of the house,” Dr. Yanotti said.
“We argue that they may not be getting the highest return.
They’re over-confident of their local area, and that’s where the home bias comes in.”