Psychological Barriers to Investing
If you are thinking of investing but too afraid to make the first move, read on as Margaret Lomas reveals practical strategies to reduce if not completely eradicate your fears of investing now.
The time seems right. The indicators are all there, telling you that now may be the right time to start, or to continue, your portfolio. You are feeling financially secure, but want to improve your potential future income. You know that the capacity for the government to provide for your retirement needs is limited, and that you must do something for yourself.
But you can’t do it. Something within is throwing up all manner of challenges for you, and you simply cannot bring yourself to hold your breath and take that leap. And, as you procrastinate, the years keep rolling on and you know, without doubt, that you will look back and regret that you didn’t take the chance when you could have.
Overcoming the biggest obstacles to investing
Many years ago we had a couple who had been to consult with us about their future. They had paid off their own modest home, and both had jobs, albeit quite low paying ones. Many of their friends had begun to work on a wealth accumulation plan to allow for a better retirement, and so they felt compelled to follow the crowd.
We structured a personal strategy for them, and all that was left was for them to begin to make the property selection with which they were the most comfortable. On no less than 4 occasions, a property was found, negotiated upon and contracts drawn up, when they would suddenly pull out of the deal after a weekend of angst, headaches and endless questioning about ‘what if’.
After a long session with the couple, I ascertained two things were at work. Firstly, they were attempting to embrace a strategy, which was foreign to them because other people said they should, not because they were truly committed themselves. Secondly, they were in a comfort zone, being debt free, and had a fear of debt, which was blocking their vision for the future.
We addressed these issues by first of all establishing what the future might look like if they did nothing, and then working out if this picture of the future fulfilled all of their goals. We discovered that, in fact, their present course of action would not allow for them to enjoy one of the basic goals they had always held dear – to buy a caravan and tour the country. In formulating and then painting the picture for this goal, the couple were able to see that taking no action now would result in this goal becoming an impossibility, and that the action to be taken was not a big risk one. They didn’t need to build a portfolio of dozens of properties, which was definitely outside of their comfort zone due to the debt level required for that, and a few well chosen inexpensive properties would probably be enough. We also established that, since going into debt again was also a problem, they should start small with a very cheap property, and build from there.
This couple now hold 9 properties in their portfolio and are looking for more. Having started the process, and then subsequently discovering that none of their fears materialised, they gained confidence and now even enjoy the process. And their goal for the caravan is well and truly back on the agenda. In all of the years I have been assisting people to buy property, I have discovered that all of the knowledge in the world can still do very little for most people – it is the psychological factors which become the barriers that prevent many people from investing success. Knowing what these factors are, and then identifying your own personal psychological barriers so that you can remove them, is the most important first step to take as an investor.
Fear is the first factor that will usually holds people back from moving ahead with their property portfolio. This fear comes in a range of disguises. Here are the main ones, along with some strategies for overcoming them:
Fear of losing your own home
If you have already achieved a comfortable debt level, and have considerable equity in your own home, you may worry that making the wrong choice will lead to financial ruin. The likelihood of this is very small and this fear must be put into perspective.
Imagine you own a home worth $300,000 and you owe $150,000. You buy a property for $200,000 using a debt of $210,000 secured across your own home and the new property. Your debt is now $360,000, and your equity has been reduced, for now, by $10,000 down to $140,000.
For any number of reasons, it all goes horribly wrong and you are forced to sell the new property. To do this quickly you must reduce the price, and you only get $180,000 for it. Now you have a debt of $180,000 which is $30,000 more than you had when you started.
This is far less than ideal, but it also is unlikely that an extra $30,000 of debt (which would cost you a net of $34 a week) will force you to lose the home you already had.
To deal with this fear, work out the worst case scenario and ask yourself if you can afford that outcome. If not, then you should not buy, but it is more likely that the worst thing to come out of a failed property investment is an increased personal debt that you probably can manage. And remember, the actual likelihood of this result is very small anyway.
Fear that you will not be able to afford to repay the debt if the property is vacant
When people first begin to consider this possibility, they imagine that there will possibly be months in which no income is being achieved and they will be required to meet the mortgage repayments from their own pocket. If this is your fear, you must consider:
1. Buying positive cash flow property will give you extra income which can assist to pay for periods of vacancy. A property with a $20 a week positive cash flow gives you a total of $1040 a year, which, for a property renting at $200 a week, provides 5 weeks of allowable vacancy before you must even reach into your pocket.
2. Tax deductions reduce your shortfall. So, technically, for every $200 a week that you do not receive, a tax payer in the 30% bracket will receive an additional $60 tax break, reducing your commitment to $140, or allowing more weeks of vacancy.
3. In reality, if a property is vacant for a week or two, you can take action then by reducing the rent. Even if you reduced a $200 a week rent to $180, you would only be losing $20 a week ($14 after tax breaks) and you will have boosted your chances of attracting a tenant as you have become competitive.
4. For vacancy caused by an inability to rent out a damaged property, you should be sure to have landlord’s insurance. At an after tax cost of around $7 a week, this is vital.
From this you can see that there are many ways to deal with vacancy issues, and it is highly unlikely that your property will need to remain vacant for long enough to cause financial stress to you.
Fear of making the wrong choice
Buying a property involves making a large purchase. Even if you borrow all of the money and use little or none of your own, your commitment is a big one. Why is it, then, that people so carelessly choose property, using all manner of emotional reasons to buy? Investors mistakenly believe they can use a ‘gut feeling’ about property, or base their choices around what they would personally like to live in. Worse still, they follow the crowds, take advice from their unqualified friends, buy a property in their dream location near the beach and largely put faith in people who have a vested interest in their purchase – such as the person selling the property to them! It’s no wonder so many bad choices are made.
You can never remove all of the risk when you invest in property, but you can manage it and increase the chances that what you buy will work out well.
However, you can only do this by becoming educated first. The reason I developed the 20 Must Ask Questions® when buying a property was to provide a benchmark which becomes the minimum criteria that a property and area must display before it becomes likely to perform well. If your fear is that you will choose badly, then leave your emotions at home, learn how to invest well and arm yourself with solid research. Then, commit to only buying property which can satisfy them.
Every year I attend the property expos held all over the country. And every year it seems the same people approach me to tell me that they heard me last year, felt inspired but then after they got home they simply could not bring themselves to get started. They admit to thinking about it alot, but the action never seems to occur
© Your Mortgage magazine and republished with permission.