Try an experiment. Pick a stock, a business venture, a real estate area, or another kind of investment and ask your friends and family what they think about it. What do you think will happen? We are willing to bet you will get as many different answers (or at least variations of answers), as the number of people that you ask. The question is: Why?
Where Do Our Emotions Come From?
Everyone has past experiences that shape the way they view the world today. Without delving deep into the psychological, everyone carries emotional baggage attached to the events that have occurred at previous times in their life. This is unavoidable; however, the key is to recognize the facts from your own jaded perception.
If someone heard their parents warn them about a potential real estate crash (similar to that in the 1980’s), and never looked deeper into it, then it is likely they will avoid real estate investments. If someone read an article in the paper about a murder in a certain area of town, they may feel the area is dangerous. Had that same person never been subjected to these stories, they would likely never have had any fear attached to real estate, or a particular area of town.
The Origin of Fear
We are actually only born with two natural fears: the fear of falling and the fear of loud noises. But what does this mean for all of the other fears we have? Every other fear in our life has been learned and taught to us. Someone with different experiences will have completely different fears. How do we know if something is dangerous or should be feared?
Think back to some of the fears you may have: spiders, snakes, etc? Or maybe things a little more pertinent: bankruptcy, certain areas of town, technology stocks (especially after 2001), etc? What do we have to believe to feel these fears? Chances are our fears are based on a small piece of information we gained in the past. We have now spent our lives focusing on supporting evidence for this fear and perhaps overlooked real, refuting evidence.
Your Emotions’ Role in Investing
Since emotions and fear are based on “hearsay” and false evidence that seems real, and not on facts and fundamentals… they have no place in investing. It is impossible to make an unbiased investment decision when emotions rule the basis of that decision.
Investing out of emotion and not fundamentals is the #1 investment mistake.
Fear is not the only emotion to be careful of. If you are choosing a place to invest because you grew up there or because it is close to your home, or you think the house is cute, or worse yet, because your parents told you too . . . Be Wary.
Fundamentals vs. Emotions
Investing fundamentals are based on objective, unchanging, non-deviating facts, whereas emotions are based on . . . well . . . very little, if any facts. If your research and due diligence meets the criteria, and is in line with your ultimate goal, then make the investment. However, if you are basing your decision on the past advice of a friend or relative that no longer applies to a marketplace, then run away until you can get the facts straight. You want undeniable, measurable facts.
Real Estate Fundamentals
If a city is growing in income level & population, the development in the area is starting to take off, the price to income ratios are low, vacancy is low, interest rates are low, unemployment is low, and prices have begun to climb after a plateau . . . then invest. If an area is beginning to redevelop (i.e. new buildings) with a few projects and things are starting to clean up, where traditionally this has been a “tough” area of town, then invest and ignore the fear.
There are lots of economic indicators that will make a particular city (or area) a good place to invest in real estate. These indicators are what you need to make your investment decisions based upon. If the type of transaction fits into your portfolio (flip, wrap, lease option, joint venture, cash flow, etc.) and will help you meet your goals, then the decision is unquestionable.
The Boring Side of Investing
After you have done 1 or 2 transactions, real estate investing should become boring. It is a mindless game. Either the fundamentals are there, or they’re not. The numbers work or they don’t. You don’t care what the house looks like, where it is located, or what nationality is prevalent in the area. The only thing you care about is this: Are the facts good and will it help me reach my goal? Investing in real estate is a mindless process that can be repeated over and over.
The fun of real estate investing is rising above your fears & emotions, and enjoying your wealthy retirement as a result.
Tags: Real Estate Investing