Investing in property can be a risky business. There’s no guarantee it’ll go well – if there was, everyone would be doing it. So how do you get yourself to a point where you’re comfortable enough with the risk involved to be able to say ‘stuff it, I’m in’?
Work through our guide on the questions you need to ask yourself to increase your confidence in investing and you’ll be signing that title deed in no time!
Question One: Why are you investing? (Hint: It’s not for the money)
Surely investing in property is all about profit, right? You’re not actually investing in property with the idea that it’ll make you smarter or more attractive to the opposite sex (although it may have both of these side effects). What we really mean when we’re doing something ‘for the money’ is that we’re doing it for the things that the money will buy us.
Top tip: If you know what it is you’ll spend your profits on, and those things form part of your value system (aka what’s important to you in life), then deciding to invest becomes a much easier choice. Here are three examples of values you may hold that fit with the goal of investing in property.
# Security – If a sense of security is something that’s important to you, investing might appeal because you’ll have something of value to help fund your retirement or in case you lose your job. Knowing that you have an income stream from your investment property can increase your sense of safety and security in the world – it’s like an insurance policy in that way – and that potential extra safety might motivate you to take action to invest.
# Independence – Having another income stream from an investment property could buy you the opportunity to work part time, or to work at a job you love (but that has a low pay packet), because you’ll have income coming from more than one place. You’re after the opportunity to not be solely reliant on your employer (or your customers/clients) as much as you are now. Phrased this way, investing starts to sound pretty attractive and worth the risk!
# Family – Investment property income can be used to support your family in times of hardship. You could support your partner stopping work, give money to a sick family member, or rent the property to your uncle who just lost his job at a reduced rate for a time. On the positive side, income from investment property might let you spend less hours working and more time with your family, or become an asset for your children to inherit.
Each of the above examples contains compelling reasons for committing to an investment. They are emotional reasons to commit, and have much more power to drown out your fears than the idea of pursuing money for its own sake.
How to do it: What’s your why? Do you identify with any of the values listed above, or do you have another reason for investing in property? If you don’t know why you’re considering investing in property, ask yourself what you’d do with your extra investment income. The answer to that will suggest why you should invest in property.
Question Two: Where’s Your Stop Point?
Fear is at its most powerful when we fear the unknown. Humans are great at adaptation. We can put up with all sorts of terrible arrangements if those arrangements are predictable. Where we come unstuck is with uncertainty.
Many people fear risk because they don’t know what will happen. You can reduce this fear by working out exactly what would happen to you if your investment went bad. From there, you can work out how much loss you can tolerate before you’d have to pull out. Once you know this, you just write a plan and stick to it. It takes away uncertainty, and the fear that you could end up with nothing.
How to do it: If you were to face a loss from your investment, how much could you lose and still be ‘okay’ (not great, but you would survive)? This will vary from person to person but it might be something like ‘if the house price fell to the value of the loan’. So for example if you bought a 200,000 property with a loan to value of 85% (30,000 deposit), then you’d survive until the house dropped in value to 170,000. You may decided to sell if the property dropped in value to 180,000 so you weren’t left with a debt and would recoup a third of your initial investment. Or it might be that if the property wasn’t cash flow positive within 1 year, you couldn’t afford to keep propping up the loan from your income/savings. Or that if the price of the property hadn’t increased in seven years, you’d want to sell and use your cash to renovate your current house as the investment wasn’t doing its job of providing for your values as identified in step one. It might even be ‘I’m prepared to stick it out as long as I can walk away with the clothes on my back and my day job still ongoing’.
Whatever your stop point might be, work out when enough would be enough. That point at which you may have lost, and lost heavily, but it wouldn’t destroy you. And then work out how you’d cope if it went a bit worse than that (because you can’t always sell when you want to and things always cost more than we expect!). Once you know this, you have replaced your fear of uncertainty with a stop point – your Plan B.
Your Plan B takes away a lot of emotion from investing and from making the decision on when to bail. When assessing risk, it pays to stay as emotionally detached as possible. Fear shuts down the rational part of our brain and stops us analysing complex situations effectively.
Knowing your stop point and Plan B also makes investing a ‘safer’ option if you’re trying to convince your partner/ an investment partner to share the risk. Knowing that they’ll be essentially okay by taking on this risk, even if they lose some money, will drastically reduce their fear around investing.
Question Three: Do You Have a Magic Wand?
Well, no. What am I getting at here?
There are essentially two components to any worry: there are the things that we can do something about, and the things that we can’t control (without a magic wand). To minimise your fear, you need to distinguish between the two. You need to do something about the things you can, and accept that what you can’t change, won’t change by worrying about it.
How to do it: List out every fear around investing that you have. Every. Single. One. Once you’ve done this, turn the list into two lists: one which has things you can do something about on it, and one which has all the things on it you can do nothing about. For example, your first list might have items such as ‘I don’t know enough about investing to start now’. This can be fixed by learning more (make sure you quantify what ‘enough’ is though or you’ll be learning forever!). Your second list might have worries on it like ‘The market might drop and I would lose some money’. Yes, this is a possibility, but there’s nothing you can do about it. And worrying won’t stop the market from dropping. For these worries, return to your Plan B for reassurance. Yes, the market might drop, but you have a plan for that. You actually know by how much it can drop before you need to pull out, and then you know that you will still be okay. Not great, buy okay (and richer in experience at least!).
Whatever you can do to minimise risk, like research, planning et cetera, you should do those things! But you can’t control the market or manifest the perfect tenants. Accepting that some things are out of control and always will be can give us the power to move forward. Waiting until everything is perfect and the outcome assured means you’ll be waiting until that magic wand shows up in the mail (I posted it last week, I promise!).
Hopefully by now you’re feeling more confident in investing.
You’re also in the right place to gain knowledge and advice for research. As Andy says, ‘With just a small amount of the RIGHT knowledge, you will soon discover that the amount of risk associated with property investing can be reduced significantly’. If you haven’t already done so, have a read through his ‘Start Here’ page, or watch his ‘Getting Started Playlist’ on YouTube.
And if you’d like more information about tips and tricks to improve your mindset to overcome fear, then check out http://www.lanahallpsychology.com/blog.
About the author: Lana Hall works as a Psychologist and coach in Australia. Her focus is the importance of knowing and living by your values as the key factor to success and overcoming fear. She offers an online course in finding, living and enjoying a valued life as well as individual consultations that incorporate cognitive and behavioural change with mindfulness and values-based living to overcome specific client concerns. You can find out more about Lana’s work at www.lanahallpsychology.com.