The major X-factor that property investors fail to appreciate

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A property investor is, by definition, someone who purchases property with the intention of making an income or a profit.

But with less than 50% of investors sticking it out for more than 5 years and up to 90% never owning more than 1 or 2 properties, there is enough evidence to indicate that being successful is more complicated than just buying properties.

“How do I become a successful property investor?” is the million-dollar question that fuels the industry in and of itself.

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The answers centre around buying in the right location, in the right market, for the right price, and at the right time – a veritable perfect storm of conditions.

The X factor

However, there is a major X-factor that is not considered in that equation: you.

Each person comes into property investing with their own set of prejudices, misperceptions and biases that affect their decision-making ability and influence everything from the types of properties they will consider, to the advice they will take on board, and even whether they will actually invest in property.

While an investor may believe that they have done everything possible to form an objective viewpoint on potential property investment, true objectivity is practically impossible and the truth is only relative.

You see… our brains are wired to make sense of the world and then work within those boundaries.

This means that some things naturally don’t make the cut, because we don’t value them or have enough exposure to them.

And other things become prominent enough that our brain actually creates shortcuts and we don’t even have to think about them before registering exactly what they are.

Take this for a random example:

If you love ice cream, you are very familiar with its attributes – sweet, creamy, cold – and you make an instant connection whenever you see a cone or a scoop.

But if someone tries to give you those strange ice cream dots (a big craze in the United States that hasn’t quite taken off in the same way in Australia), it throws you for a loop and takes a bit longer to register.

We form biases to help us make sense of the world.

A fascinating experiment that was published in Political Behaviour in 2005 gives us valuable insight into the effect of our prejudices and biases.

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The study tested whether false or unsubstantiated beliefs about politics could be corrected.

The researchers found that media reports not only reaffirmed previous beliefs but actually strengthened them.

The participants ignored information that didn’t fit their worldview and they clung on to that which did.

In other words, we tend to seek out information that tells us what we already believe.

This information – and the inherent biases – becomes very interesting when applied in a property investing framework.

1. We get stuck in our ways.

The political bias study showed that clearly, we don’t like change.

In fact, change causes us so much discomfort that we are driven to rationalise or justify the information that sits most comfortably with us – through a process called cognitive dissonance.

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For example, an investor’s investment strategy could be buying cash flow positive properties in regional Australia.

Even when valid evidence such as minimal rental and capital growth showed his properties underperformed, he is able to justify his purchase and back it up with information that supported his belief that it was the best investment strategy for him.

2. Changing our way takes work.

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