Property investment might come across as highly intimidating to those who’re about to dip a toe into the waters.
But that could be because you’ve heard about heavy losses that people have incurred, which might have arisen from common investment mistakes.
In this article we look at some of the most common ones made in real estate investments and how you can avoid them.
1) Not doing enough research
Performing insufficient research is actually an easily preventable mistake. Doing research isn’t limited to finding information on one specific property. You also need to have a good understanding of the market.
You can gain valuable insights by doing on-the-ground research. For example, going to a property you’re interested in and talking to the neighbours can give you a glimpse of how it’s like living there.
Being physically there also allows you to gauge the overall condition of the property, as well as the readily available amenities.
Another tip is to seek advice from real estate agents. However, don’t mistake their personal opinions as property facts, though it’s good to have expert advice.
Here are a few quick tips for planning a property investment in Malaysia:
- Research on investment strategies that you can adopt. There are two commonly used strategies in Malaysia: buy and flip, and buy and sell.
- Creating a list of investment property criteria. For example, knowing what facilities you want a property to possess.
- If you’re interested in a certain property, compare it against similar ones in the area to get a gauge of whether the price is reasonable
- Find out if property prices in the vicinity have appreciated or depreciated in the past 10 years.
- Factor in all kinds of costs that you’ll have to bear, such as legal fees, taxes, maintenance fees and more.
- Know who the potential property you’re investing in would attract. For example, are they families or young couples? Different types of property appeal to different groups of people.
- Find out if there are any new or future developments/infrastructure in the area.
2) Not having a concrete plan
Most investors expect a high return on investment, but they don’t know how to plan for it.
Planning for a property investment requires you to be far-sighted. The biggest mistake of a failed plan is that people don’t tend to look at the bigger picture.
You also need to know your investment goals and come up with contingency plans. One of the most important rules is to never invest money you can’t afford to lose.
After all, no investment is guaranteed to be smooth-sailing, so having enough cash for a rainy day is definitely a smart move!
The importance of a fallback plan is more crucial than you think. You’ll not lose all your money when the market isn’t in your favour. You’ll also know what to do next because you have already made plans for it.
3) Making irrational decisions
Making irrational decisions when investing in property is one of the worst mistakes one can make. These decisions are made without studying the facts and reliable information. Here are two common ones:
a. Making decisions that are emotionally driven
Real estate investors often fall prey to greed and anxiety. Greedy investors buy many properties at once when the market is thriving. And anxious investors sell their properties when the market is down.
Some investors also buy properties based solely on gut feelings, or the advice of "friends". But making decisions on baseless grounds is the worst thing an investor can do.
b. Anchoring bias
Investors often make poor decisions during property investment. This happens because of anchoring bias, where they make decisions based on little or irrelevant information.
For example, investors would refuse to sell their property that has long lost its value. This is because they anchor the fair value estimate to the original price of the property.
PropertyGuru Tip
In a broad economic sense, the term ‘fair value‘ refers to the potential price of a goods or service.
Investors would then continue holding on to a piece of property, hoping that it will return to its original purchase price.
Another example is investors who make their decisions based on a property’s historical value. If it had a high property value, investors would buy the house and expect a high return.
While information such as its historical value can be useful, it should not be used to make decisions.
4) Overconfidence
Real estate investors get optimistic when the market goes up, assuming that it will continue to do so.
Similarly, investors get too confident about their judgements. This mostly happens to long-term investors because they assume they know the property market well.
One way to curb this is to have a goal-centric approach. When you have a goal, you’ll only make decisions that bring you closer to it. This helps to keep you focused regardless of the market condition.
To prevent this, you can start by asking yourself these questions: What sources of information do you rely on when you make decisions? Are they facts? Do you rely on hunches?
Other ways include constantly reviewing and evaluating your investment strategies. Or, having a person you trust to keep you on track with your investment plan!
5) Speculation
Speculators are investors who try to identify areas or developments that will enjoy significant capital appreciation. These individuals seek to gain a large profit from a short term investment.
Successful speculation relies on a few factors. This includes superb timing, high capital growth rates, and a market in which demand exceeds supply.
Investors, and even property experts, would try to speculate. However, speculation isn’t a safe investment strategy. Many people don’t have the patience to invest long-term, so they try to time the market.
PropertyGuru Tip
Market timing is an attempt to buy or sell an asset based on predictions of the future market value. However, market conditions are highly unpredictable.
Speculation is a dangerous thing to do because real estates are a type of asset that isn’t easily converted into cash.
When a property market is down, properties can take months, or even years, to sell! If there are little to no risks involved in speculation, the returns can be pretty impressive.
But realistically speaking, this is a high-risk gamble. Market conditions change overnight, so it’s always better to strategise appropriately.
Property investment is undeniably complicated. Take the time to read up on the do’s and don’ts, the risks involved, and seek professional help to understand the real estate market better. If you’re a first-time investor, the best advice is to not rush into it. If you’re still not sure whether to invest in property, you can read our guide here.
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Disclaimer: The information is provided for general information only. PropertyGuru International (Malaysia) Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.