There are plenty of times when the heart, not the head, governs decision-making. We buy a car because it fits the image we want to show the world, choose clothes that make us feel good. But while emotions have their place in the choices we make, successful investing requires decision making that’s objective, not subjective.
Subjective decision-making is the kind that’s ruled by feelings rather than facts and figures. And there’s a place for that in real estate too. When you’re choosing a place to make your home for at least a few years, your feelings can – and maybe should – play a pretty big role. If price and other “objective” considerations are equal, choosing a house that reminds you of your childhood home may make sense.
But when it comes to investment properties bought with the intent to generate income, decision making has to be objective. The prettiest property in town doesn’t mean much if it costs too much and can’t generate income from rents. Investors need to consider cold hard facts and figures – a process that Jason Hartman sums us as Three Dimensional Real Estate Investing.
Those three dimensions allow an investor to take a clear look at the key parameters that indicate investing success:
Emotions can enter into this aspect of buying a property, too – it’s easy to jump at a property just because it looks like a bargain, or sellers say it won’t last long. Those kinds of feelings can make price the sole determining factor of whether a property makes sense. But the objective investor also considers:
Again, emotions ranging from comfort (there’s an easy way to handle the process with friendly lenders) to fear and aversion can overrule more important factors such as what terms and rates work best for individual investing goals. Investors making impulsive decisions can end up paying more or getting less.
Not much else matters if the property doesn’t produce the desired income. Calculating the Rent to Value ratio and other factors gives a clear picture of the cash flow potential of a given property – and those figures need to guide decisions.
In other aspects of investing, too, the head has to prevail over the heart. Choosing advisers not for expertise, but for personality, or skimping on learning about the investing process because it’s boring, won’t get an investor very far on the road to building wealth.
How to keep decisions objective – and put those pesky feelings in their place? The key, say life coaches and financial experts, lies in mindfulness: pay attention to how you’re feeling and what seems to be pulling you to or away from a given option, Have clear goals, too, and know what steps you need to take to achieve them – a way to keep the head, not the heart, firmly in control of your investing success. (Top image:Flickr/evgeniydodorov)
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The Jason Hartman Team