The 4 E’s of Real Estate Investing

As a property investor, there are some key things you can’t afford to ignore. It doesn’t matter what scale you’re at, it’s critical that you remain aware of the many factors that can and will have an impact on your career. This applies to real estate investing, property investing, property development and any kind of financial speculation.

When I look back at my career and the deals that didn’t work out as I’d expected I realise now that there were four areas I hadn’t paid attention to – I call them the 4 E’s of Real Estate Investing.

Take my word for it – you need to avoid these things. There’s no scientific basis behind what I’m telling you here – no metrics or financial analysis – but you must have an understanding of it. Two of the factors are internal – you have complete control over them, but you may not be aware how they’re influencing your decisions, and the other two are completely external and outside of your control. The four of them together can completely ruin your investment portfolio.

Ultimately it comes down to understanding your strengths and weaknesses, understanding human behaviour and the cognitive biases that we have: the things we do without even realising we’re doing them.

EGO

The ego is a massive issue for investors up and down the pecking order, whether you’re a beginner or a billionaire. It doesn’t matter what kind of investor you are, the ego has a big impact on your decision making and the way you process information.

When you’re a novice, your ego is working against you – you may be lacking confidence, making you slow to pull the trigger and make an offer. Don’t sit on the fence: if you’ve done your analysis and know that the deal is right, you’re ready to invest.

Conversely, the ego can make you overconfident.?That applied to me in a big way back in the mid-2000s: everything was going great and I felt like I could do no wrong. Every deal kept bringing in a profit and I got complacent. I paid less attention to my due diligence and started to go on gut instinct. You have to be really careful about that – it’s where you’re at your weakest, or rather, you’re at your greatest risk of making a mistake.

Always take time to reflect on the decisions that you’re making. Look at yourself objectively and ask yourself, ‘Is my ego in check?’

EMOTIONS

Emotions are closely linked to the ego, but are more to do with your feelings and thoughts around a deal or a property that you have your eye on. If you have fallen in love with a property and its obvious, you’ll be spotted a mile away by the agent working for the other side, giving them the opportunity to pump up the price. Remember to keep your cards close to your chest.

If you’re selling a property, you might get emotionally locked in on the price, and if you receive a lower offer than you want it can feel like an insult. I‘ve been in this situation before and had to sit back and reflect on whether I was actually receiving a fair offer and just not seeing it that way. If this happens you to you, take a moment to consider whether you’re analysing the situation correctly.

Just remember the property market is cyclical: think about the wheel of a bike going round and round, sometimes the market is up, other times its down. If you’re in it for the long haul, you’ve got to recognise this cycle never stops, and over your career prices will fluctuate - prices and demand will go up, and they'll also go down. You’ve got to have the resilience to weather that cycle: don’t get hung up on prices. When a property price reaches its maximum, it doesn’t mean it’s going to stay there!

ECONOMY

Never forget that the price of your property is completely connected to the wider economy, the economic circumstances and environment that you’re in, and that elements beyond your control can impact all of that. For example, if interest rates start to spiral up - that’s going to have an impact on your value, your cash flow and your borrowing rate. Or take supply and demand – it changes over time, it’s never static. The market is constantly fluctuating: over- and undersupply both have an impact on the demand.

When you were buying your property you assumed certain rents and interest rates, but these things are never static. The way to avoid getting into trouble with the economics of the deal is to build in a contingency. Analyse your deals assuming different scenarios – you start with your base scenario: todays prices, rents, interest rates, construction costs, refurbishment costs – whatever it is, that’s your base case.

Now take a look at the pessimistic side of the deal – what if interest rates were to go up, or if construction takes longer than you anticipated? Have a look at those factors, make small adjustments (say 5 or 10%) and see how that plays out on the overall metrics of your deal. You could find that all it takes is for a small reduction in the rental rates and the deal doesn’t work any longer.

EVENTS

Sometimes we can plan and plan but external events occur outside of our control and catch us completely unawares. Obviously COVID-19 is the most recent recognisable example of this, but what if you have a health scare or a family member gets sick? Normalcy Bias, or Continuity Bias, makes us assume that when everything is going great, that it’s going to stay that way: we often don’t plan for things that could change our personal circumstances or the global market overnight.

It’s always a good idea to take a look at your deal from the perspective of something bad happening – if that one deal goes wrong, could it pull down your entire portfolio? Have you tied your borrowings into other assets? Don’t paint yourself into a corner, be sure to leave yourself a little wiggle room. It may seem like I’m catastrophising right now but this single piece of advice may just prove invaluable to you in the future.

If any of this resonates, or you have any questions – let me know in the comments.

If you're looking to enter the property investment market yourself and curious how the investors mindset works, you may find my weekly podcast Behind The Facade of use.