By the way what type of investor are you?

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Type of investor

I have found that investors tend to fall into one of five profiles:

1. Observers are people who have all the mental qualities of a great investor, but they don’t take action, so they end up witnessing success rather than experiencing it. They are often very knowledgeable. They have usually read dozens of books and attended many seminars. They “understand” all about property investment. In fact many think they are in the game because they are studying all the time, but they are not. They are not in the game, they are not on the field, they remain a spectator in the stands.

 

2. Passive investors tend to spend little time looking for a property. They are not interested in understanding all of the ins and outs that go along with creating a property portfolio such as finance, tax laws and so forth. They are more likely to buy the first thing they come across rather than conducting any due diligence or consulting industry professionals for advice.

 

Passive investors tend to buy things based on emotional value rather than investment value. The financial aspect of the deal becomes an afterthought. If they hold their properties long enough, the value of their properties usually increase in value over time, and these people think they are investing — but in reality they are not. They are just collecting properties.

 

3. Speculators are investors who love the action and excitement of the property market. They are gamblers who love the thrill and often confuse risk-taking with investment. They look for the next “big thing” or the latest fad or they buy something on the basis of its potential selling price rather than its actual value.

 

The trouble is that by definition, speculation is taking above average risks in the hope of achieving above average results. Unfortunately most speculators think they are “investingwhen in reality they are not —they are gambling.

 

4. Active investors usually put in some degree of work in order to find a good investment prospect and gain a basic understanding of the principles involved in property, finance and taxation. They tend to seek professional advice with regard to the structuring of their portfolio and they conduct some due diligence in the hope that they can increase the likelihood of making a viable investment purchase. Unlike observers they take action. Unlike speculators they minimise risk. Unlike the passive investor, they buy on the basis of investment value.

 

5. Finally, there is the analytical investor who tends to run around for months, sometimes even years, examining every nook and cranny of the property markets, endlessly comparing values and sales, reading reams of material regarding real estate “do’s and don’ts” and seeking advice from as many experts as possible before they commit to anything. They like to conduct as much due diligence as possible and look for the “ultimate” investment property.

 

Many are under the impression that the more effort and energy you sink into property investing, the greater the rewards are likely to be. In other words, the passive investor would enjoy smaller gains than the active investor, the analytical investor would come out on top as they were willing to do the hard yards and the speculator may make windfall profits.

 

This is only partly true!

 

Many passive investors purchase their investment properties the way they would buy their house – emotionally. They tend to buy their investments near where they live, or near to where they work or close to where they want to retire or holiday – all emotional reasons. Some live to regret their investment decisions and have difficulty holding on to their investments. In fact many Beginner Investors sell their properties after only one or two years. Those who can hold on do well, but more of that later.

 

The speculator occasionally does well, but more often than not they lose out. The next “big thing” rarely tends to work out and the next hot spot (that area that was bound to go up in value) probably hasn’t performed well in the past for a reason. The worst thing that can happen to a speculator is that he gets it right the first time. If he does, this builds his confidence and he then “invests” more in the next speculative deal until he takes too big a risk or does one deal too many and then loses it all.

 

The active investor usually does well if he seeks advice from a team of consultants. He realises that he needs a good team of consultants around him. He uses an investment savvy finance broker to help him through the money lending maze and a smart accountant to set up structures to protect his assets and minimise his tax. He will often use a buyer’s agent to level the playing field for them even if they study and understand the property markets. Because they tend to think of the big picture, they tend to achieve excellent returns on their investments while exposing themselves to little risk.

 

What about the analytical investor? Let me share a story with you …

 


 

Leonard’s story

A few years back I attended a property expo where I caught up with Leonard – a successful IT engineer. He has subscribed to my newsletter for over five years and when I first met him four years earlier he said he was going to invest in property.

 

When I asked him how his investments were going, he still had not made a move. Instead, he continues to research the market.

 

He is very intelligent and has a tendency to over-analyse things, hence he is still waiting for the perfect property, the perfect time or the perfect set of circumstances in which to buy. What he doesn’t realise is that this will never happen.

 

If he had invested in a good suburb in his home town of Melbourne three or four years earlier, his property would have significantly increased in value.

 

If he had chosen a high-growth suburb, the property’s value would easily have gone up by more than 20 per cent. Instead, he told me he has $500,000 sitting in the bank waiting for the “right opportunity” to come along.

 


 

On the other hand, let’s look at an example of a passive investor who was so naive that they bought the first property that they could get their hands on twenty years ago for $50,000. At the time, all his friends and family told him he was crazy – he paid way too much for the house, it was a bad time to buy and it was simply an idiotic thing to do.

 

Although he may not have done all the homework that he should have, he still bought in a popular inner Melbourne suburb and guess what? The value of that property is now in the order of $500,000 and he may well have built a considerable property portfolio using his growing equity.

 

It really doesn’t matter that much if you’re a passive, active or analytical investor. Maybe you’re not into running around examining every aspect of the property market, or maybe you are and that’s not such a bad thing – as long as you don’t get so absorbed by the process of learning about property that you forget to actually use that knowledge and buy something!

Michael Yardney

www.metropole.com.au

 


Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

 
 
 
 

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