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Investor Mistakes: Not understanding Counter-Cyclical Investment and FOMO/FONGO

Updated: Aug 4, 2021

Here's a big mistake property investors make: Not understanding Counter-Cyclical Investment and FOMO/FONGO

When you are new to trading property, you and everyone around you is making good profits, you feel invincible!

This was how I felt leading into the biggest mistake I ever made in my property investing journey.

I started property investing in 2014 and in that first 12 months we were in a very hot Auckland market. Vendors were very realistic with selling their properties and first home buyers and investors loved to buy our renovated stock, which resulted in our sale prices increasing as well as our profits. It was like we couldn’t lose! A deal with $30,000 after GST profit would turn into $60,000 easily. It was no wonder that we didn’t see the signs of the market changing, we had dollar signs in front of our eyes.

In 2015 The Reserve Bank announced that in October of that year they would change the Loan to Value Ratios for investors in Auckland only from 20% to 30%. So instead of needing around $110,000 to buy one of our renovated houses, investors would need a $165,000 deposit.

Before the LVR kicked in my Joint Venture partner and I purchased a house in September 2015 to settle in October 2015. Our FOMO (Fear Of Missing Out) had well and truly kicked in and there was no way that we were going to miss out on any deals! In October we saw the market grind to a halt. All of the investors retreated from the Auckland market (you still only needed 20% deposit to buy in the regions) and there was no ‘traffic’ through any open homes. We still had to settle this property with the sinking feeling that we had paid too much for it and that we should have thought about how new legislation would affect our trading business.

The biggest disappointment in all of this is that I had invested $30,000 in mentoring that year to ‘keep me safe’, whatever that means now. There were no words of wisdom or tales of caution leading into this time from my mentor to steer me away from making this kind of mistake.

We settled this property and proceeded to renovate it, all while knowing that we would struggle to sell it when we were finished. We tried an agent with cheaper commission to try to at least break even with no luck. There were no buyers looking to even get a single offer. It was now Christmas time which is normally slow and coupled with the LVR changes there was no movement in the market. We tried to sell it privately in January which we had success with in the past, listing it with a ridiculously low purchase price just so we could offload it. While we had some buyers through, no one wanted to commit over that time.

By now we had held the property for four months, which seems like a very long time when you are used to selling them in one to three months. We were starting to panic and the loss was getting greater by the day.

We got another expert in to look at the property and see what we could do to increase its saleability. We spent the money and completed all the things she highlighted, even though it hurt to see us fall further into the red. Hoping that our efforts would be enough to get a buyer to commit pen to paper and at least give us an offer.

In February 2016 we listed with a top agent, top commission too, which hurt. She had a similar listing around the corner which was going to auction and we hoped that she could transfer some buyers over to our property. She had limited success with our property, but did manage to get us an offer which we signed straight away. I remember jumping in my car straight away to sign the deal, just in case the purchasers changed their mind and bought something else. There were so many renovated houses on the market at the time.

The offer had a six-week settlement date on it which meant that we held the property for seven months. This was four more months of holding costs than we anticipated, a greater renovation cost after having to do more to it, more agency fees with having three different selling methods and a greater commission than was budgeted for. Even though it was a loss I felt so relieved that I could sleep at night again and that I could move on to another deal which I would think through with a lot more clarity!

Unfortunately, in March 2016 the market started to pick up again, it seemed that buyers just needed some time to get their heads around how the LVR changes applied to them. While FOMO got me into the mess of buying a property while big changes were going on, FONGO (fear of not getting out) resulted in me rushing the sale of the property and making a loss. Had I waited and watched the market, I might have seen indicators that it was starting to pick back up. I then could have done things differently, which may have resulted in a profit.

That is the unfortunate part of property investing, we can try to predict what the market is doing but no one has a crystal ball. Our best bet is to make sure that we turn over the properties quickly so that we are buying and selling in the same market and alleviating our risk.

The craziest part of this story is that I wouldn’t actually change a thing. Yes, I lost money, but I learned far more than I lost. In the years since I have not made those mistakes again, therefore was it actually money well spent? Ha-ha, well not everyone would agree but I spent a lot of money on mentoring and I don’t regret that money either. Is there really a difference with the money I intentionally spent apposed to the money I lost if both taught me how to be a better property investor?

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.

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