The Psychology Behind Real Estate Investing Risks: Do you have what it takes?
The real estate industry is unpredictable. Learn what risks are involved with real estate investing and how to overcome the psychological barriers.
Real estate is not a guaranteed buy-sell-make-profit game. It is an industry filled with uncertainty. You could win or lose. I have had my fair share of losses, and I have gained a lot as well. But most of all, I keep an open mind and continue learning.
The more you buy and sell property, the better you get at the game. But you need to have the right mindset from the beginning as a real estate investor. Before you make your first investment, think; are you ready to risk facing something like the subprime mortgage crisis? Not that that will happen, but it’s a great illustration of just how unpredictable the real estate industry can be.
The collapse of the housing market led to a sticky situation for homeowners, they could neither pay their mortgages nor sell their assets for profit. Could you handle the pressure of such a scenario, or would it mark the end of your real estate investment journey and dream of retiring early?
How Do Beginners Invest in Real Estate?
The real estate industry can be quite intimidating for beginners, but you can begin your journey with a few easy methods.
Real Estate Investment Trusts
REITs enable you to invest in real estate without actually owning the physical property. You get to buy shares in a company that works with income-producing real estate and earn high dividends. You can reinvest the dividends to grow your investment further. Similarly, real estate crowdfunding is a great new way to invest in real estate and most platforms have very low entrance minimums.
This is an easy way to own rental property. It involves buying a property with multiple units, living in one of the units as your primary residence, and renting out the rest for income. The money obtained from the rent can pay off the mortgage and other maintenance costs, and facilitate the acquisition of more property. Here’s more on how to house hack your way to early retirement.
House flipping is another beginner-friendly form of real estate investment. It entails buying cheap, underpriced homes, making renovations with as little as possible, and reselling it in the market for profit. Carefully assess the level of repairs needed before making a purchase. It’s particularly smart to live in the house as you fix it, and complete the renovations in as little time as possible.
Take small steps in your investments as you understand the industry. Learn from major investors such as Ron LeGrand or Grant Cardone, and study the mistakes that other investors have made to avoid falling into the same traps.
What Risks Are Involved In Real Estate Investing?
1) The Unpredictability of The Market
You can never be sure of the state of the market at any one time. It could be a buyer’s market, which is unfavorable for sellers, or a seller’s market. With ever-changing economic conditions, growth in the market could quickly take a different turn. There is never a guarantee that you will make a profit when you make a sale.
2) Credit Risk
This is a significant risk that comes with real estate investing. When making an investment using leverage, the bank owns the property until you fully pay the loan. You risk facing foreclosure as a result of the inability to pay your installments on time. A foreclosure limits your chances of getting loan approval for future investments.
Real estate property is generally expected to increase in value, but again, it is not guaranteed. It could drop over time. For instance, an increase in the crime rate or occurrence of natural disasters reduces the value of property in an area. Similarly, an increase in foreclosures and short sales in the location affects the value of your property due to the availability of low-value properties.
4) Negative Cash Flow
If you are dealing with a rental property, experiencing negative cash flow is a possibility. It could result from a low occupancy rate. Bad tenants who are irregular in their rent payment or cause too much destruction can affect cash flow as well. Buying property with hidden structural problems could also cost you.
5) Liquidity Risk
Real estate property is not liquid. In case a need for cash occurs abruptly, you cannot rely on quickly getting back the money you invested in the property. It takes time to find a worthy buyer, and the process of completing a sale is long. Real estate investors commit their money with the understanding that it is for the long term.
Psychologically, what does it take to invest in real estate?
If you want to be successful in your investments, develop these three traits.
High Risk Tolerance
Most people prefer avoiding a loss than making an equivalent gain, this kind of attitude doesn’t fit in real estate investing. It is a high-risk industry. Be financially and mentally prepared to lose or gain. Do not put all your eggs in one basket, and avoid making rash decisions based on rumors of an adverse change in market value.
Overconfidence, or thinking you have more control over the outcome of your investment than you really do, can lead you to making a biased investment decision. . Successful investment in real estate requires an open-minded assessment of market forecasts and trends. While it’s good to be positive, objectivity is of paramount importance.
Real estate assets are not liquid. Avoid investing money that you are likely to need in the near future, or tying up all your cash in properties. You would not want to be in a situation where you are forced to sell in a buyer market for financial reasons. Holding real estate provides the most value. You should only sell when you stand to make the most profit.
How to Overcome Psychological Barriers to Invest in Real Estate
Here are a few measures you can take to take charge of your fears and invest in real estate.
Conquer Your Loss Aversion
Half of the US population is loss intolerant. It is a mentality that holds you back from the endless possibility of wealth creation through real estate investment. Understand that risk is necessary to make any substantial gain, especially in investments. Start with low-risk investments and work your way up to riskier opportunities.
Work on your emotional intelligence (EQ). Emotional intelligence refers to your ability to control your emotional reaction to situations. The best investors have a high EQ. They deal with losses calmly and do not let it affect their rationality and decision making.
Focus on your why. What is your big reason to want to get into real estate investing? Think of the financial independence it will bring and the freedom to quit your job. Focus on these things, and you will have a reason to trample over your fear.
Do Not Fear Credit, But Be Meticulous
As a real estate investor, you also need to overcome the mental boundary of taking on credit, for fear of foreclosures. However, be smart about it. Borrow what you can repay promptly. You need to maintain a good relationship with your lenders.
If you’re investing in a rental property, work a plan on how you will maximize the cash flow from your property. Have a backup plan such as savings or an alternative source of income that can service the loan.
You need money to make money, and OPM or other people's money is one way to grow your wealth.
Carry Out Adequate Research
Before investing in real estate property, do your homework. Carry out adequate research on the location that you want to purchase your property.
How has the appreciation rate of property in that area changed over the last few years?
What amenities are in the area? What are the plans in the area with regards to development?
What are the crime rates? How are the weather patterns?
How has the population grown over the last few years and what is the level of traffic congestion during rush hours?
Work with a local and experienced real estate advisor in the area. They will have in-depth knowledge of the location and provide helpful insight.
However, be careful not to get stuck in analysis paralysis, where you over analyze and over think, and end up not making any investment decisions. Use the information you gather to take an informed risk.
Do you have what it takes to build wealth in real estate?
The most successful real estate investors have a few things in common – high emotional intelligence, a tolerance for risk-taking, and the ability to remain objective. Only when you take calculated risks can you make money from real estate investments.
Learn to treat each investment individually. Avoid making the assumption that a new project will work because a previous one worked, and carry out due diligence every time.
Short-term gratification has no place in successful real estate investing, always think long-term. When you hold property, you stand to make the most profit. Follow these tips, and you will be on the path to building a secure financial future.
Have you ever invested in real estate? How did you get past these mental hurdles?