There is No Room for Emotion in Real Estate Investing
Real estate is purchased with money and money can be emotional, so separating emotion out of real estate investing may be more challenging for some. Every person I have seen that left real estate investing all had one thing in common. They had way too much emotion tied up in their investing decisions.
An emotional investor
For example I know of this emotional investor who loved everything looking neat and clean and wanted the best of everything. He had a nice looking side by side duplex. Without any prodding or request by the tenants he added decks to the back of each. He changed the gravel driveways to cement driveways and widened them. He added lots of nice landscaping and was proud of the new look he had created for the property.
The interesting part, none of these improvements added value to the rent. Perhaps during a tenant changeover you may add a little increase because of the new deck but clearly the cost of these improvements will never be recouped from increased rents. The result of course is he was not making any cash flow.
His remedy to increase his cash flow
He bought another duplex down the street. The cash flow was much better on this property and he felt the extra cash flow would balance his portfolio.
Now why do you suppose the cash flow was so much better on these properties? You guessed it. It was lower priced because it was an older more tired building which needed maintenance and updates. What kind of updates do you suppose he performed on these properties.
Indeed he over spent on this property also. There was no cash flow. Now as he was a perfectionist he wanted to do all his own managing of the property (which included mowing the lawn) he bought a brand new John Deere garden tractor complete with the mower and snowblower and everything needed to take care of the properties.
Oops two properties and no cash flow, what is next?
Frustrated with the now negative cash flow on two properties and tired of taking care of them both he decided he should sell the properties.
Clearly with all the improvements he did he should be able to sell for top dollar and recoup his money, right? Wrong!
Perhaps if these were single family homes, these emotionally based repairs could have been recouped. These however, were duplexes. Who buys duplexes? Investors: and investors are looking for cash flow and the price they pay must be proportionate to the rents collected.
His best option is to sell to a select audience who wants to buy an owner occupied duplex. They do exist but the buying audience is drastically reduced.
All said and done he sold the properties to these owner occupied buyers as he indeed had great looking buildings. These buyers can own a property and get help with the mortgage with the neighboring tenant.
They were on the market a long time however, as finding these buyers in a small pool of buyers takes time. After paying realtor expenses and closing fees, he put just a couple of thousand dollars in his pocket for each property, BUT WAIT he paid 20% down for each property and he put thousands of dollars in renovations.
Needless to say in the total picture, he lost lots of money, All because he was using emotion to make his decisions.
I could go on with lots of similar stories. The real take away is always the same. Emotionally based decisions rarely will make you money; think like a business owner because buying an investment property is like buying a business. Approach it with logic and look at the numbers.
I see emotionally based buyers buy property, get excited as this gentleman did over his new purchases and eventually leave the business frustrated and believe real estate investing does not work.
I, of course, can cite hundreds of stories where investors make a small (or even large) fortune. It is all in the approach. Emotionally based decisions or logically base decisions are the difference between success and failure.