Are you an emotional property investor?

Ok, it’s confession time! While I regularly profess my love for real estate investment, I have, to-date, never truly fallen head-over-heels in love with any property.

That is to say, I’ve never seen a property that makes me think, “Darn, I must have this! Whatever the price!” Neither have I owned a property that I’ve not been willing to give up for the right price.

When I first started hunting for property, I made the mistake of thinking that I had to fall in love before making the biggest ticket purchase of my life. Thus each viewing went by unfulfilled, and I wasted a precious 2 years without making any investments.

Fortunately for me, my work as a bank relationship manager and subsequently as a real estate lawyer, gave me a lot of exposure to the inner workings of some very wise and brilliant property investors.

I soon discovered that the properties that give the best returns aren’t necessarily the most appealing of homes. The first property I ever owned was a small two-bedroom apartment in district 10. I recall very little about the apartment itself, except that the master bedroom was dark and smelt of unwashed laundry (busy, bachelor tenant!) What I do remember rather more fondly was that it gave us instant 6.7% p.a. rental yield on our initial purchase price, and double-digit annual capital gains for the 3 years that we held it for.

I have also found that unlike fixed deposits, your annual rate of return doesn’t naturally increase the longer you hold the property. In fact, investors that make the best returns are often those that are very swift and decisive. (I just had dinner with a longtime client-turned-friend of mine tonight. I still recall that when I first worked with her in 2007, she said something along the lines of, “I can make a property purchase decision faster than I take to choose toilet paper at the supermarket!” And yes, she always makes good returns!)

The hermit crab that fails to upgrade its home will find its growth stunted…

I also meet many negative examples of property “investors” from the other end of the spectrum. These are the folks who hold on to their properties forever, boasting about the huge paper profits they have made and how cheaply they were able to buy the property all those years ago. They happily hold on to the property, pleased with how clever they are to be getting 4-5% yield. (Please note this common mistake. When assessing whether a property is worth holding, rental yield is one means of getting a rough assessment of whether the current market price is overvalued or undervalued. This rental yield should be calculated based on current not past purchase prices.) In the meantime, these folk unwittingly act as stepping stones for wiser investors, who use the overpriced units to sell off comparably cheaper units, lock in profits and move on to greener pastures.

In any case, I find that people who are ill-disciplined about cashing out once their target prices are reached (if they even have the clarity of mind to set such targets in the first place) often find themselves caught in a vicious cycle of purely paper returns until they eventually find the maintenance and upkeep required of an old apartment with failing plumbing/electrical wiring outweighs the falling rental – hardly an ideal time to lock in capital gains!

My parting message is this – if you wish to snowball your assets, you stand a better chance of doing so by evaluating the opportunity cost of holding your current property portfolio. Which assets are peaking, overvalued or lagging behind in market performance? Be objective, and seek to replace these with assets of better potential. Fighting for top dollar on your current asset(s) may win you the price battle eventually, but waiting out for that golden price may ultimately hurt your overall investment performance.

One thought on “Are you an emotional property investor?

  1. It reminds me of an article that I read quite a while back. Let me just cut and paste it here:
    Dividends Are a Long-Term Investor’s Best Friend

    I’ll never forget the time 25 years ago when as a young stockbroker – still wet behind the ears – I suggested to a client that she sell one of her oil stocks.

    “I can’t sell that stock – I need the dividend,” she said.

    I reminded her that it was only yielding 2%.

    “Son, it’s yielding 2% to buyers today. My annual dividends are more than my original investment.”

    Two lessons here…

    1. When a client calls you “Son,” you’ve almost certainly offered some bone-headed advice.

    2. Never mistake today’s payout for a long-time investor’s yield.

    So if you’re looking to fund a retirement 10 or 20 years out, dividends then will almost certainly be a lot higher than they are today.

    I’m sure you can see where the argument is wrong here – If the nostalgic, share-loving client had sold out and bought another stock that gave 6% instead, she would be making more than 3 times her original investment every year! “Bone-headed” advice indeed! But certainly the author was bone-headed for taking it as good advice even up to today. I wouldn’t want to be his client!

    As you mention in your post, the same goes for property investment!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s