As our property markets move into the upswing phase there will be more and more positive news - the problem is this will give some investors a false sense of confidence.
They will think they can buy just any property and it will increase in value over time - not true.
Less than 4% of the properties currently on the market are investment grade.
But the rising market and positive media will lull many investors into a false sense of security – of overconfidence and this will be their downfall.
Remember that 92% of property investors never get past their first or second property –- they never get the financial freedom they’re looking for.
In general they don’t get sufficient capital growth to get the deposit for the next property or rental growth to service the loans.
They have either bought the wrong property, or not set up their finance correctly and they never achieve the financial independence they are looking for.
However, our brain plays tricks on us…
I’ve found most property investors are overconfident and don’t realise how poor their investments are performing.
It’s a bit like something I recently read: the vast majority of drivers claim they have above-average driving skills.
Similarly, overconfidence affects property investors.
When we meet potential new clients at Metropole one of the questions we ask them is “How have you done at investing?”
Just like the drivers I just mentioned, more than half assumed they outperformed the average investor.
But as we dig deeper we tend to find something even more disturbing- many investors are quite literally clueless about how to select investment grade properties while others overestimate how their investments performed.
It’s much the same with beginning investors who believe much of what they read on the internet.
At worst they think they’ll become real estate moguls over night and at best think they know how to outperform the market.
But when we ask them questions like:
- How well do you understand and apply the 5 to 7 fundamental disciplines of investment to your decisions?
- How many local markets do you know intimately?
- Where do you get your market research from when making a property purchasing decision?
- How well do you understand the three essential requirements of ownership structures?
- What criteria do you use to buy properties to outperform the averages and deliver wealth producing rates of return?
..they suddenly realise the gap between their overconfidence and reality.
This is understandable
Investing is hard.
We spend untold hours reading articles online, researching new ideas, watching videos, and listening to podcasts.
Yet most investors have uncomfortably little to show for their effort, so they resort to convincing themselves otherwise.
In his book Your Money and Your Brain Jason Zweig writes:
“By fibbing ourselves, we can give a needed boost to our self-esteem.
After all, none of us is perfect, and daily life brings us into constant collision with our own incompetence and inadequacies.
If we did not ignore most of that negative feedback – and counteract it by creating what psychologists call "positive illusions" – our self-esteem would go through the floor.”
The probelm is...
When you are overconfident, all sorts of dangerous behaviours arise that throw your investing results off track.
For one, your forecasts of what’s likely to happen to the markets are likely become less accurate.
And as your confidence rises, your perception of risk diminishes.
Financial advisor Carl Richards says, "Risk is what's left over when you think you've thought of everything else."
I’ve explained here how I have expectations rather than forecasts as I recognise the world is more nuanced and I’m constantly my views.
Now there’s a big difference between forecasts and expectations.
I expect there to be another recession in the next decade. But I don’t know when it will come.
I expect the property market to boom over the next few years and then prices will tumble again. But I don’t know when.
I expect that some investments I will make won’t do well. But I don’t know which ones they will be.
I expect interest rates will rise. Probably not for a number of years. In fact, I don’t know when.
And I expect another world financial crisis. But I have no idea when it will come.
Now these are not contradictions or a form of cop out.
As I said…there’s a big difference between an expectation and a forecast.
An expectation is the anticipation of how things are likely to play out in the future based on my perspective of how things worked in the past.
A forecast is putting a time frame to that expectation.
Of course, in an ideal world we would be able to forecast what’s ahead for our property markets with a level of accuracy.
But we can’t, because there are just too many moving parts.
Sure, there are all those statistics that are easy to quantify, but what is hard to identify is exactly when and how millions of strangers will act in response to the prevailing economic and political environment.
Then there will always be those X factors that crop up.
But I’m a better investor because I am not overconfident and don’t really believe I know exactly what’s ahead.
Overcoming overconfidence is not easy
Every investor needs confidence, to take on debt and the risks involved, but two things might stop you becoming overconfident.
1. Become objective when measuring your success as an investor.
Don't just assume you've done well because the property markets are performing strongly.
Measure exactly how you've done.
You may be surprised – hopefully pleasantly, but some people will be brough back to reality rather than being overconfident.
2. Get an independent team of property professionals around you.
If you’re the smartest person in your team you’re in trouble, but make sure your advisors don’t have a vested interest.
Get a good team of independent people around you who can see your blind spots and look at your investment performance subjectively (rather emotionally.)
Now is the time to take action and set yourself up for the opportunities that will present themselves in property this year.
If you're wondering how to take advantage of the new property cycle you can trust the team at Metropole to provide you with direction, guidance and results.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
In “interesting” times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that's what you exactly what you get from the multi award winning team at Metropole.
If you're looking at buying your next home or investment property here's 4 ways we can help you:
- Strategic property advice. - Allow us to build a Strategic Property Plan for you and your family. Planning is bringing the future into the present so you can do something about it now! This will give you direction, results and more certainty. Click here to learn more
- Buyer's agency - As Australia's most trusted buyers’ agents we've been involved in over $3.5 Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective - that's something money just can't buy. We'll help you find your next home or an investment grade property. Click here to learn how we can help you.
- Wealth Advisory - We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
- Property Management - Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.