Do you know the 4E’s of Real Estate?

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As a property investor, there are key things you always need to be aware of. It doesn’t matter what scale or stage you’re at, it’s critical that you stay aware of the factors that can and will have an impact on your career. This applies to real estate investing, property investing, property development: really, any kind of financial speculation.

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

Take my word for it – these are things you really need to avoid! There’s no scientific basis behind what I’m telling you here – I’ve got no metrics or financial analysis to back up what I’m saying, but even anecdotally, you have to have them on your radar.

Two of the factors are internal – you have complete control over them, but you may not be aware of how they’re influencing your decisions, and the other two are completely external and outside of your control. The four of them together could completely ruin your investment portfolio if you’re not careful.

#1 – 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, your ego can have a huge impact on how you process information and make your decisions.

When you’re a novice, your ego can work against you: if you’re lacking confidence in your abilities, you might be slow to pull the trigger and make any offers. Remember though, if you’ve done your analysis and know that the deal is right, you’re ready to invest. Don’t sit on the fence – who knows what you might miss out on!

But on the other can, your ego can make you overconfident. That’s what happened to me back in the 00’s: because everything was going so well, I felt like I could do no wrong. Every deal kept on bringing in a profit, and as a result, I got complacent. I paid less attention to my due diligence and started to go on gut instinct, and that was a huge mistake. If you’re relying solely on instinct, you’re at your weakest – meaning you’re at o are at the greatest risk of making some critical errors.

When you’re making decisions, always give yourself some time for reflection. Look at everything and objectively and make sure you’re keeping your ego is in check.

#2 – Emotions

Emotions go hand in hand with your ego, but are more to do with the feelings you might have about a deal or property. This is where having a poker face can come in handy – say you’ve very obviously fall in love with a property, you’ll be spotted a mile off, giving the vendor the opportunity to pump up the price. Remember to keep your cards close to your chest.

On the other hand, if you’re the vendor, make sure you’re not getting emotionally locked in on the price you want. If you receive a lower offer than you were expecting, it can feel like an insult: I‘ve been in this situation before and really had to sit back and think it all through, whether I was actually receiving a fair offer but just couldn’t see it. If this happens you to you, take some time to consider whether you’re analysing the situation correctly.

Remember that the property market is cyclical: think about the wheel of a bike going round and round, sometimes you’re up, other times you’re down. If you’re in it for the long haul (and you really should be), then you have to understand that the cycle never stops, and prices will fluctuate throughout your career. Develop the resilience to weather that cycle and don’t get hung up on prices – when a property price reaches its maximum, it doesn’t mean it’s going to stay there!

#3 – Economy

Now we’re getting to those external factors. You should never forget that the price of your property is inherently connected to the wider economy and the economic circumstances and environment that you’re in, and that elements entirely outside of your control can impact all of that. For example, when interest rates started to spiral up, people noticed the impact it had on their value, cash flow and borrowing rate.

Whilst you can’t control the economy, there are some things you can do to mitigate the effect it’s going to have on your deal, or portfolio. When you were buying your property you would have assumed certain figures, but never forget to build in a contingency. Analyse your deals with different scenarios in mind – start with your base scenario: today’s 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 – rising interest rates, or construction taking 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 it only takes a small change in one area and the deal doesn’t work any longer.

#4 – Events

Sometimes we can plan and plan but external events occur outside your control and catch you unawares. Obviously COVID-19 is the most recent recognisable example of this, but it doesn’t have to be a global pandemic that knocks you off course – what if you were to have a health scare or something happened that took you out of action for a while? Continuity bias makes us assume that when everything is going great it’s going to stay that way: we don’t tend to plan for those things that could change our personal circumstances (or the global market) overnight.

It’s always a good idea to take a look at a deal from the perspective of something bad happening and looking at what kind of domino effect it could have – if that one deal goes wrong, will it pull down your entire portfolio? Have you tied your borrowing into other assets? Don’t paint yourself into a corner, 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.

Ultimately, navigating the Four E’s 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.

If you’re thinking about really making a career in the property industry, it can be a daunting experience, so why not invest in my FOUNDATIONS course? This course will take you through the fundamentals in simple, jargon-free language, explaining how the market functions, what you need to watch out for, and giving you the steps to help you avoid costly mistakes!