updated 15th October 2016

Psychology of Investors

People often confuse wealth creation with other issues, such as becoming a property authority, gaining prestige or being important

Although investing in property can be financially and emotionally demanding, tens of thousands of Australians invest in bricks and mortar every year. Why is property such a popular investment option – and how can you avoid diving into a dud investment?

Property transactions can be complex procedures, with the finance broker, legal reps, vendor and purchaser coordinating to a finite window. For most people, the process of purchasing a property – even for investment purposes – is often an emotional one.

Queensland investor Eliza Jones admits that purchasing her first property was an emotional experience, and although she says that the process was “overwhelming”, she found it much less difficult than anticipated.

“For me, this was one of the biggest decisions of my life,” Jones says of buying her first property, a two-bedroom unit in Townsville. “It was quite overwhelming at times… [but] if I’d known how easy it really was, I would have done it a long time ago.”

Jones went on to purchase a second property, adding that because she’s a single parent her motivation was to secure a strong financial future for herself and her daughter.

Why do we seek wealth?

Karen Baumgart, property investor and real estate agent, believes that Australians seek wealth because essentially, it equates to stability and security.

“In Australia, the mentality has always been to get married, buy a house and pay it off over the next 30 years. That’s what our parents did,” Baumgart says.

“I’m 31, I’m in the next generation on from that, and we’ve still got the same mindset – we still want to buy a house and bring our family up in it. But now, we want to invest in more properties because we realise… [that] one property is not going to be enough.”

Rosemary Johnston of the Property Investors Association of Australia has more than 10 years of corporate, professional and personal coaching experience; she reasons that people often confuse wealth creation with other issues, such as becoming a property authority, gaining prestige or being important.

She also believes that those people actively seeking a secure financial future are effectively seeking a more flexible future. “We have been raised on a diet of radio, television and internet advertising offering the subliminal implication that to be successful is to be able to exercise choice – with financial choices being rated very highly,” Johnston says. “Choices to spend money, have an indulgent lifestyle and a wealthy retirement are seductive.”

The appeal of property investment

People like to invest in property because it’s tangible – and, if they already own a home, they feel like they know what’s involved in purchasing property. Rental income and potential tax concessions also make property ownership an attractive investment option.

Johnston believes that for many, property-accumulation can be status-driven. “Property becomes a tool to prop up [a person’s] perception of themselves; to make others hold them more highly and to boost self-esteem through the reaction of others,” Johnston explains.

The danger, Johnston warns, is that glossy prestige marketing can lure the status-seeking investor into overpriced deals that fail to capitalise on expectations. “These people buy for prestige rather than wealth creation. They want an address and landmark that their mother-in-law, social set and the boss approve of, and almost envy,” she says.

To avoid this, investors need to leave their emotions at the door and base investment decisions on accurate facts and figures, derived from solid, autonomous research – not from a developer’s inflated property valuation or exaggerated rental appraisal. “Look at property transactions with open eyes to examine the business of creating wealth,” Johnston suggests.

Property vs shares

Many investors turn to property investment rather than the share market, Baumgart says, because they simply understand it better. “I’m not confident with shares or anything like that,” she explains. “With property, you can compare things visually, you can look at the location and you can kind of envision where you can go with property.”

The appeal of owning a definitive ‘bricks and mortar’ asset, rather than intangible, paper-based share investments, is also strong, particularly down under. “I was just speaking with a couple of guys from the US and they said that in America, a lot of people rent. They’re just not in that kind of mindset to buy property,” Baumgart says. “But in Australia, the mindset has always been to work hard, buy your own home and have stability for your family.”

This article has been republished with permission from Your Investment Property magazine. Try our Loan Repayment Calculator and find the best repayment strategy for you.