The nightmare of an emotional property investment

Look at the numbers, not the heartbeat

When you invest in property, your aim will ultimately be to make the profit or income that will give you the lifestyle you want. To do this, you must take emotions out of the investment equation. The best property investments are those where the numbers add up. If you forget this and invest with your heart instead of your head, your portfolio could suffer for years.

This article tells Ben’s story. Now Ben was a savvy guy, and, as you’ll see, one with some experience in property. Despite this, he still made the fatal mistake of letting his emotions cloud his judgement.

The property investment intention was a good one

Ben had been in the commercial real estate business since he had left school. He’d been with the same company for 20 years and had worked his way up from trainee to junior partner. He was diligent, committed, and well liked by colleagues and clients alike. But he wasn’t entirely happy with his lot.

Ben had heard from acquaintances in the business that there was a lot of money to be made in residential property. Some of the most successful property investors he had read about started with no knowledge of property markets. Many had become property millionaires by the time they were in their early forties. While he was coming late to the game, he had a big advantage over these: he was sure his experience in commercial property would stand in good stead when buying residential investment property.

Finding that first investment

Ben understood that there were two ways to make real money in property. He could buy and sell residential and profit from a rise in value, or buy a property and rent it out for income. His preference was for the latter.

He’d seen property values rise and fall, and knew that investing for a short-term capital gain relied heavily on luck being with you. Property markets are fickle creatures. If the property fundamentals are good, then you’re virtually guaranteed to see the value of an investment rise in the long term. But in the short term, property prices could fall.

During his search for a suitable investment opportunity, he was told about a particular property coming to the market. It was a house he knew. When he was a kid, before he left school, he used to work for the lady who owned the property. He used to look after the gardens, mowing the lawns and tending the vegetable patch – which he had always considered to be a misnomer. That vegetable patch was bigger than all the gardens in the road where he grew up put together.

He looked back at those days and remembered how he’d told his parents that one day he would own a big house like that. Now he might have the opportunity to do so.

A dream come true

Ben visited the property to try to see Mrs Dryland. However, it wasn’t she who answered the door. It turned out that his ex-employer was now residing in a care home, and her family wanted to sell the property to make sure that their mother would receive the best care in her last few years.

Ben came away from the house with mixed feelings. He felt sorry that Mrs Dryland was now in care. However, if he could buy the property he’d be helping her out. He’d also fulfil a boyhood dream. And, perhaps best of all, he’d have immediate income. The man who answered the door was renting the house. He worked in an investment bank, was married, and had two small children. They loved the house, and never wanted to move.

Within a few weeks, Ben had met with Mrs Dryland’s son and daughter and had agreed on a sale price. The property was his.

When dreams become nightmares

For a few months, everything ran smoothly. The tenant was as good as gold, paying his rent on time and never making a complaint. Then, towards the end of the lease period, Ben received bad news. The tenant had been made redundant a couple of months earlier. His settlement money was running out, and he was finding it tough to get a new job. He gave notice to quit.

Ben had no alternative but to accept. The margin between his buy-to-let expenses and his rental income was too narrow to drop the rent, even on a temporary basis.

The tenant left, and Ben set about finding a replacement. He approached two letting agencies to do the tenant search for him but was not expecting what they both told him. The house may have been big and well appointed, but it was in the wrong location to attract much demand for rental. Plus, with the banking sector particularly hard hit by the recession, the flow of high-salaried renters who could afford such property had virtually dried up.

After a couple of months without so much as a single viewing, Ben asked the letting agents what they would do in his situation. It was suggested that he drop the rental price by a third. Even then, they couldn’t guarantee to find a tenant.

Ben’s dream home had turned into a nightmare. He couldn’t afford to drop the rent; the negative cash flow would kill him. He decided he had to sell. That’s when he discovered just how bad an investment his heart had made.

Crushed by an emotional investment

He had the property valued. Twice. Both valuers told him the same story.

  • “Properties in this location just aren’t in the demand they once were.”
  • “I could have got you more last year, before this damned recession.”
  • “The problem is there’s no infrastructure here. The train station is a 20-minute drive, and with the local convenience store closing… well, it’s getting to be a difficult place to raise a family. Beautiful, but difficult.”

Ben had used most of his savings as the deposit to buy the property. At best, he could afford three or four months of mortgage payments before he would have to default. He considered remortgaging his property to make good the difference between the rent he could get and his expenses. His wife refused to put their home in jeopardy.

He had no alternative other than to sell at a loss. It wasn’t quite as bad as he had feared. He only lost £90,000 plus costs. He’d owned the house he loved for less than a year. For a few months, Ben had lived his dream. Now he had to find a way to recover from the nightmare.

What went wrong?

When I spoke to Ben about his experience, he was already able to tell me what he did wrong.

“I didn’t run the numbers,” he said. “I don’t believe how stupid I was. My job is all about the numbers. I saw this house – one I’d fallen in love with all those years ago – and all my training went out the window. There was a tenant already in place. He was never going to move.

“I didn’t consider the downside, or that the location wasn’t as great as I remembered it to be when I was a kid. Plus, buying that particular house, it was the ultimate symbol of my success.

“I even toyed with the idea of selling my home and moving in. But it’s too far away from any shops. My kids would have to change schools, and quite frankly, the closest school isn’t up to scratch. Plus, I would add 30 minutes each way on my journey to work.”

What did Ben do next?

We’ve got Ben back on track with a couple of well-planned property investments. He’s recouped the losses he made and is now building a future. It’s been hard work, but every investment has been made ‘cold’ – there have been no emotions involved at all. It’s the only mindset to have when you invest in property.

Contact one of our team today on +44 (0)207 923 6100, and we’ll start the search for a property investment that makes sense by the numbers – because it is the positive numbers that will change your life for the better.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
December 27, 2016

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