It’s not easy to identify what makes a good property investor and what makes a poor property investor. However, over the years I’ve recognised a number of mistakes that poor property investors make that the good ones don’t. With this in mind, this week I’m going to highlight some of the things you should avoid if you want to be in with a chance of making it in the property world.
Mistake 1: Too much procrastination
Despite good intentions, poor investors or “would-be investors” often take too long to agree a deal. This is most likely due to a fear of spending their own money or funds borrowed from the bank. A way around this is to adopt the “salami principle”, in which you break down everything into bite-sized chunks.
To do this, first ensure that the figures stack up. If they don’t, pull out of the deal. Secondly, set your price. If you can agree terms, fine. If not, pull out. As and when your offer is accepted, move forward and instruct your surveyor or valuer. If you find your offer is miles over the top, once again pull out or renegotiate. Finally, instruct a solicitor. If anything comes up in the searches that worry you, again, pull out or renegotiate.
In other words, rather than freeze in fear, try coming out of your comfort zone in stages. There will be plenty of opportunities to pull out right up until you sign the contract, so there’s no need to feel totally overwhelmed.
Mistake 2: A fear of negotiation
When most investors receive property details and look at the asking price, they automatically accept that this is where negotiations start. Then, in the spirit of “playing the game”, they tend to limit their offer to 5% below the asking price for fear of how the vendor will react.
If you have a figure at which that property works for you, then this is the price you should try to achieve. There’s no point in having an offer accepted if it means you now own an unsuitable property. If the price doesn’t work for you, move on.
Mistake 3: Placing too much trust in valuations
Valuers have a tendency to down value. As a generalisation, at best they will accept the purchase price as being the value, at worst they will knock a bit off “to cover themselves”. Unfortunately it’s very rare that a valuer will report the value at a higher figure.
So it can and does happen that you know you’ve negotiated a bargain at a price below the true value of the property, but the bank’s valuer adopts the purchase price. Inexperienced investors might conclude that this isn’t such a good bargain after all. Instead, they should have confidence in their instincts, especially if they have conducted thorough research.
Mistake 4: Developing tunnel vision
Many investors starting out will develop a niche. Often it will be that having bought a particular type of investment, or having bought in a particular area, they will continue to buy that type of property, or to buy in that area.
But there’s more than one way to skin a cat and there are endless opportunities if they’d just widen their thinking. Why not student lets in another town? Why not buy and sell? There might be good reasons why they don’t want to try any of these, but often most have just never thought about stepping out of their comfort zone. The reality is that they could be missing out.
Mistake 5: Conducting poor research
Sometimes a deal is so evidently good, that one might assume there’s little point in doing any research. However, I honestly believe that you can’t do enough research unless, of course, it leads you to over procrastinate.
Poor investors often use opinions as facts. For example, estimating the value of a property by reference to estate agent’s asking prices. Or over estimating how much a property will be worth after renovation. Or taking an asking rent from an advert in the paper as firm evidence. Poor research leads to poor deals and ultimately poor investments.
Mistake 6: Basing decisions on emotions
An investor can get “emotionally” attached to a property and rather than look at it in cold investment terms, may fudge the figures a little to make them stack up. Perhaps they regret the amount of research they did, especially if it doesn’t support their hunch. So they start to ask themselves questions as they punch away on the calculator. “What if I just knock ¼ % off the yield?” “What if I am able to sell it for an extra £2,500?” “What if I play with the figures a bit until they do stack up?”
Buy a property because it’s a good investment and for no other reason. Fall in love with the deal and not with the property.
Mistake 7: Listening to advice from those “less knowledgeable”
If you need guidance, take advice from successful property investors rather than from one of the numerous “arm chair” experts who have never put a pound of their cash on the line. If you want to be successful in property you need to study successful property investors. If you want to be successful in a particular area of property, you need to study investors who are already successful in that area. Consider how they did it and what they do.
Ultimately, if you want to be successful in property, only take advice from people who know more than you do about property investing.
There you have it. Seven reasons why many property investors don’t make a decent fist of it, seven ways you can learn from their mistakes and make sure you are successful.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor