Keeping your investing simple
As exciting as looking for a great investment property can be, it’s essential to keep emotions out of your buying decisions.
The decision to purchase an investment property needs to be clinical – based on research and analysis, not emotion.
Unfortunately, far too many investors make their buying decisions on “gut feel” or because someone else (usually an agent or a developer with a vested interest in selling the property) got them excited about the deal. And frequently these investors end up with properties that fail to deliver the capital growth or income they were hoping for.
Or they wind themselves up in knots worrying about “what-if” scenarios, and never even make the decision to invest in the first place!
While there are almost an infinite number of variations to a deal (such as location, house type, land size, tenancy, vendors, real estate agents, etc.), we can avoid overcomplicating our property investing – and keep our emotions at bay – by recognising that every decision to buy a property boils down to eight essential questions every investor ought to ask:
1. How much money do I need to put down to get into the investment?
2. How much profit, over and above my initial investment, will I receive back?
3. How long will it be before I receive the anticipated profit?
4. What are the risks – i.e. what could go wrong, and what’s the financial impact if something does go wrong?
5. How will the risks be minimised and managed – i.e. what can I do to reduce the possibility of something going wrong, and what contingency plans can I put in place in case something actually does go wrong?
6. What are the exit strategies – i.e. are there different points at which I might be able to exit the deal, and what are the potential financial outcomes at each exit point?
7. How does the deal fit with my financial goals – i.e. will it contribute enough towards the achievement of my financial goals within the required time frame, or simply slow down my progress towards those goals?
8. What is the opportunity cost of doing the deal – i.e. what else could I be putting the money and/or borrowing capacity into, and does this deal represent a better return?
If you can’t answer all of these questions for any investment property that you’re considering, then you’re introducing unnecessary risk and may be setting yourself up for a nasty financial surprise.
Of course, any investing involves risk – and this is certainly true for property investing. Things can (and do) go wrong with investment properties – the property’s value might fall rather than rise, it could be vacant for an extended period, unexpected repairs could cost money, and we’ve all heard tales of “tenants from hell” who’ve trashed an investment property and done a runner! It’s simply not possible to invest in property without accepting some level of risk.
Answering these eight essential questions before buying an investment property will help minimise the risks, and thereby maximise the likelihood of making a profit.
Simon Buckingham is the director of Results Mentoring.