Investor Mistakes: Analysis Paralysis
Analysis Paralysis By Arn Mehta
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
When it comes to buying investment property, the numbers are obviously very important. Purchasing without a plan and not understanding what the market value may be can cost you tens of thousands and the potential opportunity costs of hundreds of thousands of dollars.
Having a set of buying rules is critical but so too is understanding what you are looking to achieve in the short, medium and long term.
Sometimes having a set of rules that are too stringent, without any real reason why they should be like that, can prove detrimental to achieving success in property.
When I began investing in property in the early 2000s, my first set of rules given to me by my mentors at the time were;
· Buy property that was 20% below its market value
· The property must have a 12% gross yield
Yes, in Auckland. I know it would be nice to get yields now that would be even half of that at say 6%, and yes you can still find them in Auckland although they are a lot harder to come by.
Now of course finding property with such a criteria was never going to be easy, but you could find them. In certain areas of Auckland, for example, it would be easier to find them than in other parts of Auckland and I’m sure most parts of the country will be much the same. There are normally more expensive suburbs where it would be harder to find a good deal and the more affordable suburbs where you are more likely to find a suitable investment property.
However, I was trying to apply the same buying criteria to all parts of Auckland. One of the first properties I could have bought was a 152m2 three-bedroom unit plus study and a garage in a block of 6 in Epsom. For those that aren’t familiar with Auckland, Epsom is one of the more affluent suburbs and is very sought after, particularly if it is in “double grammar zone” which this unit was. That is, in zone for two of the most prestigious public schools in Auckland (Auckland Grammar School and Epsom Girls Grammar School). People pay huge money to be in zone for these schools.
I had a conditional offer on the property at $200,000. Yes, you read that right, $200,000 for a 3-bedroom unit in double grammar zone. It was mine if I wanted it. All I had to say to my solicitor was to declare the agreement “unconditional” and I would be the new owner. This was in July of 2001 and I quite clearly remember the timeframe because I still have the Registered Valuation dated 27 July 2001.
What happened next? Rather than declaring the agreement unconditional, I rang the solicitor and told him to cancel the agreement. Why? Because the Registered Valuation I had obtained valued the property at ONLY $230,000. Yes, you read that right again. I had an opportunity to buy the property at a $30,000 discount with tremendous upside and I said no.
The reason why I didn’t buy was because it was only 13% below market value and not 20% below market value.
Can you believe that? This was a classic case of ‘Paralysis by Analysis’. My stringent rules with no flexibility or rational thought as to what area I could have bought in cost me big time. Just to give myself a constant reminder of just how foolish I was, I checked out the comparable sales and the Council Valuation which is $900,000. Properties in this area typically sell for a lot more than the CV so the increase is probably closer to six times what I could have bought it for in just 18 years.
I promised myself a few years later, after realizing just how big of a mistake I had made, that I would never make such a mistake again. I became a little more flexible in so much that I had to take certain areas into account and that not all areas would provide a 20% discount and to adjust accordingly.
However, I didn’t fully learn from that mistake.
This example had a slightly different twist to it. I had an opportunity to purchase a property in Mangere circa 2006. I was interested in it not only because of the price ($270,000) but also because I owned the property next door.
I put in an offer at $265,000. The agent said to me that the vendor was seeking $270,000. I let ego get in the way and felt if I held tight that the vendor would eventually accept my offer. It turned out that in the next few days there was another offer at the vendors price and the property sold.
That property in today’s value (early 2019) would be about $750K. That’s a capital gain of close to $500K that I missed out on. But the lost opportunity to me was actually far greater than that. Once the zoning changed in Auckland with the advent of the Auckland Unitary Plan, the property’s value became far greater. By owning both properties side by side I would have approximately 1200m2 of land. That would provide a lot of development opportunities further increasing the property’s value.
Thus, the cost was not around $500K but probably closer to $750K not to mention the lost opportunity of being able to leverage against this property as it grew in value. That leverage would have enabled me to purchase more property which would have also likely doubled in value in the 10 years following purchase. All of this lost opportunity for just $5K.
What this taught me was that it is important to understand your ‘end game’. My strategy is ultimately to buy and hold property over a long period of time. I don’t intend on selling down anything in my portfolio unless I can make the money made out of that property work at a far greater rate than it currently is.
I now ask myself, what is $5K in the scheme of 10, 20 or 30 years. It is really worth letting a property pass you by because of a bit of ego?
Understand your ‘end game’. Ensure you do have rules, but be willing to adjust those as the market changes. The great thing with property is that there are so many ways to profit from it. Don’t let Paralysis by Analysis cripple you. It can and more than likely WILL cost you a lot of money.
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