25/06/2009

How much does your mindset influence your decisions as a property investor and how can you change it to boost your chances of success?

The biggest part of being a successful property investor is having the right mentality according to Justin Wang, managing director of The Property Investors Alliance.

"The process of buying property as an investment is very simple," says Wang. "You don't need to be lucky, smart or rich - just buy and hold. The biggest barriers are lack of knowledge, lack of time and the social environment you're in. The key to overcoming this is personality, mentally and psychology. If your psychology is in the right state then the other three barriers will break down."

It is all very well to say that our success as property investors relies on the right mental approach, but it is another thing to possess this.

The psychological make-up of a successful property investor

Bernard Salt, demographer with KPMG believes professional property investors have a missionary like intensity to their psychology, which helps them break down the many barriers they may face throughout their portfolio journey, including those mentioned by Wang.

"The professional property investor is very well read," explains Salt. "They read everything from statistical articles to newspapers and books. Their mind set almost gets to an obsession stage. They have spread sheets and files and they know who the commentators are when they want to ask questions. They follow properties and regions over a period of time and almost treat it like a second job."

Salt says one of the key point of difference between a professional property investor and an amateur is that they don't allow the psychology - in the 'emotional' sense - come into any of their decisions making.

"A professional property investor is quite cool, rational, passionate, and even quite brutal in the way they view their investments. A lot of property investors say that they make the money on the purchase rather than the sale. So, in this, having a cool head and making rational decisions and not being swayed by emotions is very important," Salt explains.

Salt says the psychology used by successful property investors can almost be seen as a scientific process, where rationalisation, research and veracious reading make the final decisions.

"Professionals do their research, they make it their hobby, they act like sponges and will accumulate information before they leap in for the kill. Whereas a non-professional will go for a drive up the coast, fall in love with a place and then rationalise after why it is a good investment. Where as for the professional it's all about business," explains Salt.

What influences our investor mindset?

The mindset or psychology that we use to approach investment decisions are subject to a variety of different influences. The way we view debt and the risk attached to things like using our owner occupied home as collateral are individual to us as investors.

Whatever the influence, it is best to know how to identify it, so you can determine whether altering your investor psychology could give you a better chance to succeed.

1. The parental influence

Michael Yardney, director with Metropole Property Investment Strategists believes the psychology towards debt and investing stems from lessons learnt by our parents. He says this is how we get our 'financial blueprint'.

"When I first started doing property investment seminars I initially thought knowledge and research made a good property investor, but then I found a lot of people who had the knowledge but just couldn't move. This was the same for people's education and their origin. Eventually I realised their success comes from something I would call their 'mindset'. I realised a child was not born knowing how to do money, but taught these things," Yardney explains.

According to Yardney, we learn about finance and debt from our parents in three different ways.

1. Things we hear - the saying 'money doesn't grow on trees' can instil a conservative and guarded view towards spending money

2. Things we see - such as your parents arguing about money can also instil fear and pressure about the importance of having a good financial position

3. Things we experience - such as money being used to buy love or frivolous meaningless objects, can shape our ideas about what money is worth to us

Yardney says many of us taught to follow the herd - the safe herd. This means that most of our financial blueprints are ingrained with the goals to get a good education, buy a home, pay it off and begin saving again for retirement.

Usually, this encourages people to guard their money and spend it on things near and dear to them only. Taking a risk by investing in property - even if it is calculated and educated - does not usually fit into the 'safe herd' psychology.

Wang says this fixed route can directly influence a person's ability to grow wealth and achieve financial independence.

"For most people what determines their psychology of property investing is their route or path in life. Like a river in the earth, it is ingrained in us. In life we have choice, so automatically we follow the path we trust - we work, make money and spend money and work some more. We dream for perpetuality, but many of us never achieve this," he explains.

2. An innate psychology

Salt believes the psychology of great property investors comes from an instinctive and innate point which could be present within anyone.

In fact, he says the most interesting element of the psychology of property investors is the "randomness" of which investors end up becoming successful and which ones move on.

"It comes down to the individual itching to be motivated by different things. For some it may well be the views of their parents, but anecdotally I see that people come out of left field and have a fascination with property investing," explains Salt.

"To some extent this almost 'obsession' is innate, and there is an individual pre-disposition to succeed if you have the right psychology for property investment."

Salt likens his theory of the psychology of property investors to the makings of an elite athlete. For some, a sporty family can influence a successful athletic career, while for others it could just be a 'rogue gene' as Salt calls it.

"For those who invest in property, this rogue gene could be reaching their personal goals, and they see property as a rational way to get there," explains Salt.

"For these people it is a part-time roadway towards financial independence. They will work at property investing every weekend, scanning newspapers, building spreadsheets and go for that Sunday drive to feed their obsession and view properties," Salt says.

3. Your life stage

Salt believes this 'almost obsessive' psychology towards property investing can be developed at any life stage and does not necessarily depend on the age or experience of the portfolio holder.

"There is no less interest and intensity in somebody aged 26 than somebody aged 66 with property investors, even though the 26 year old has not yet had enough time and life to accumulate a great portfolio," Salt explains.

However, Salt says those approaching retirement naturally tend to approach investment with a cautious mindset.

"Baby boomers approaching retirement now are more experienced with life's ups and downs and know that property can fall. They're aware that their time in the workforce is running out and if they do invest, they can't screw it up by making the wrong investment. The succeeding generation are much more comfortable with credit and debt and see that as a pathway to prosperity," he explains.

Salt says those in their early 30's who are looking to grow a successful property portfolio are more inclined to take bigger risks to meet their goals.

"People under 35 don't remember the life of the depression and only have a perception of the world where interest rates are lower than 10% and where property prices rise. At this age you're not building your retirement fund so there is less risk," he explains.

4. Home buyer trends across the decades

The psychology of property investment is not only confined to the lives of individual property investors, it also lies with generations of home owners. Salt says the ever-evolving choices and trends of home owners have the power to influence the psychology of investors.

Salt says soldiers returning from World War 2 in the 1940's viewed inner city terraces as being dark, cramped, congested and did not consider them to be modern. Yet 50 years later, the psychology of home buyers has changed, and savvy property investors have adapted their psychology to fit the demand.

"Interestingly, the psychology around the perception of beauty and the ideal suburban lifestyle (being away from the inner city) prevailed from the 1950's onwards to the 1980's and then there was a shift in that psychology. Now the inner city character and terrace houses in suburbs such as Paddington (Sydney) and Carlton (Melbourne) aren't considered cramped and congested, they are funky, cool and at the centre of things," Salt explains.

 "Inner city living kicked off around the 1990's and has matured into a sexy thing now. The demographics are changing. Singles, couples, gays, divorcees and ex-pats all require a different lifestyle to what is on offer out in the 'burbs'. This now sets a framework for people to think positively or negatively about a particular property - especially if investors see a boom of people embracing the 'burbs' or the inner city," explains Salt.

This switch in investor psychology also occurred around 1999-2003 with the sea change movement and then again in 2003-2005 with the tree change.

"This is when markets like Tasmania emerged. A beach shack is no longer just a beach shack and the bush is no longer just the bush, but a spiritual place to regenerate," explains Salt.

Dealing with the fear of debt

If you're like the majority of Australians who have been brought up to fear debt, there are ways to bring your thinking into the 20th century.

1. Replace self-defeating beliefs with empowering values

Yardney says the first step towards changing your mindset towards debt is to recognise what your financial philosophies are and to replace any disempowering beliefs with empowering ones.

"The disempowering beliefs come from things we've heard as a child such as 'we can't afford it' or 'rich people are greedy'. Hence you grow up subconsciously thinking the same things and don't want to let yourself become this," explains Yardney.

2. Change your attitude towards debt

The choice to invest in property is optional. It is not the compulsory house, car and home  that many of us strive to achieve. For this reason, the idea of spending money on a non-compulsory asset - and risk losing everything we've worked hard for - can be scary.  

"The solution to this is forcing yourself to think of the property as an asset only. To get here, you must determine whether you see property investment as a risk or an opportunity," explains Wang.

Wang believes the only way to view property investment as an opportunity is to begin with something that is affordable and manageable for you.

"You can use this to build up your knowledge and this takes most of the risk away. But make sure you quantify your risk with numbers and work out your cash flow. If you can manage that cash flow for the next 10 years, where is the risk in that?", he says.

3. Surround yourself with like-minded investors

Joseph Chou, CEO from Ironfish says people will always be influenced most by those in their family and social circles. For the novice investor, this will be your parents, friends and colleagues.

Chou says that these influences often create a comfort zone, which can often generate a psychological barrier for investors. Stepping out of that comfort zone - especially when it involves taking a financial risk - can be a challenge.

To overcome this, Chou says all novice investors should take the plunge and surround themselves with an environment of like-minded property investors.

By surrounding yourself with risk takers and successful property investors, Chou says you can expand your knowledge bank and open your mind to the opportunities of property investing - instead of the risks.

"All property investors need someone to help them get over this. A mentor can be this person," Chou explains.

4. Using a mentor

Replacing a lifetime of disempowering beliefs with empowering beliefs can take some reinforcing. Old habits die hard, and your subconscious conditioning will lead you back to the less risky decisions and therefore an outcome with less benefit.

Yardney says the best way to keep your empowering beliefs strong is by having a mentor.

"Your subconscious mind is always being conditioned to choose between deeply routed emotions and logic. Interestingly emotions will always win because it is ingrained. The key is that the successful property investor plays to win, while the average Australian plays not to lose. A mentor can help you learn this," explains Yardney.

The benefit of having a mentor is that you can learn from their mistakes and triumphs in the property investor market. Your mentor can introduce you to their trusted contacts and help you to grow your knowledge and psychology as an investor.

"Associating with those in the same head space, who can help you move forward who are positive. Who think the glass is half full not half empty. Have a mentor who can help you move forward and mix with people who are positive, look big picture rather than small, who come from abundance rather than scarcity," explains Yardney.