Let me give you an example of what I mean by this. I’ve met investors who own property but they’re not entirely sure why they own them. They’re not sure whether they are going to give them much in the way of cash flow, and quite often the figures suggest that the returns are actually very poor. And they are not sure whether they are going to give them very much capital growth, quite often they are in areas where capital growth could well be limited. And on further questioning they are not really sure why they actually bought them in the first place. It’s kind of like it was the house down the street and so I thought I’d buy it because it would be handy to manage. Or perhaps my managing agent had a client who was selling a property and offered it to me and so I bought it.
Or perhaps, more common, is that they may go to the local Estate Agents and look at the pictures in the window. They see what looks like a nice house in an area that they are familiar with and they go in and ask the Estate Agent if they can look at the details. So the Estate Agent passes the details across the desk and they may say okay we’ll buy it. If they’re feeling really sophisticated they may offer 10% less than the asking price, and may end up buying it at 5% less than the asking price, and then they’ll feel that they’ve bought themselves a real bargain!
Who can relate to that? I have to confess that when I began buying my own properties I did exactly that before I realised I had to be far more aware of the investment fundamentals.
Although well intentioned very few buy correctly, using thought through investment criteria, backed by a process to make sure that they buy a property that fits that criterion.
The vast majority will make their investment decision something like this.
“We’ll buy a property and then we’ll wait for it to go up in value”.
If that is the extent of their investment rationale, then this is no more than speculating, particularly as many will do only rudimentary due diligence, if any due diligence at all. For many, any property will do.
Now it might sound like I’m being very critical and somewhat gloomy. What I would say, to try and redress the balance, is that although they might have got it wrong, they have at least taken action. One of the biggest stumbling blocks I see in property investment is those with a desire to be involved but who procrastinate, or who are bound by fear, and who never take action. I read once that taking action is the sign of a superior person, and so in that regard they should be applauded. But there is no point in taking action the wrong way, colloquially that is know as “getting it wrong” which is something we all want to avoid.
And believe me, when I started, I got it wrong a lot of the time, so I fully understand how it can happen.