First Rental Property

A common term that is used with real estate investors is ’emotional investing’

Emotional investing (in relation to real estate investing) can be defined as making an investment decision based solely on your current feeling, and not based on the financial analysis of a rental property. When a real estate investor purchases a rental property through emotional investing, they are not paying close attention to the analysis of the property. They might not analyze the rental property carefully in order to determine if it cash flows. Emotional investing can often ruin wannabe real estate investors. If a real estate investor tries to expand their real estate portfolio aggressively by purchasing many rental properties with emotional investing, they can get wiped out easily. If they are continuing to purchase rental properties, without analyzing them thoroughly, it will only be a matter of time until they cannot financially afford to maintain their real estate portfolio.

My fellow real estate blogger and REIN member, Chris Davies, discussed the emotional response experienced by some investors in his article, Four Steps For Better Real Estate Investing.

[youtube]http://www.youtube.com/watch?v=SsnyaElu5nI[/youtube]

For example, let’s say that a real estate investor purchases 5 rental properties over 5 years. Let’s also assume that each property that they purchase does not cash flow. In fact, each property is a negative cash flow property. This means that the monthly expenses on each rental property are greater than the monthly revenue from the property. In this example, let’s pretend that each property is negative cash flow, $500/month. Therefore if this investor owns 5 properties, this means that each month the investor is taking $2,500/month out of his or her pocket in order to feed these properties. There is only a certain amount of time that an investor can keep this up, before they start to run out of money. Sooner or later, when they run out of money, they could find themselves in a position where they will be forced to sell one or multiple properties. Feeding negative cash flow properties is especially dangerous for a couple of reasons. As mentioned previously, the real estate investor will eventually run out of money to put into these properties. In addition, since the properties are not in a positive cash flow position, there will be no change to replenish the repairs and maintenance budget, vacancy allowance, or reserve fund for the properties. As a result, if a property requires a big repair or if it goes vacant for a couple of months, there is no money to cover these expenses.

Emotional investing can be deadly, and has forced many wanna be real estae investors out of real estate investing entirely. Here is an exercise that you can use in order to detect if you are emotionally investing.

When you are excited about the prospect of purchasing a rental property, take a few moments, slow down and ask yourself this one simple question, “Does the property cash flow?” If it does not cash flow, based upon your analysis, and you feel that you are still attracted to this property for some reason, you are letting your emotions influence your judgment here. This could be due to the fact that you personally like the neighbourhood, city or town that the property is located. If the property does not cash flow, don’t even consider purchasing it, just move on to the next prospective property, and begin to analyze that property.

Thank you for reading my article. In order to subscribe to future articles, please click on the orange RSS button in the top right hand corner of this page, or you can enter your e-mail address on the left hand side of this page.