Right now, you could be making several dangerous investing mistakes… and you likely don’t even realize it.
You see, stress causes our brains to react with powerful emotions. These unconscious, instinctive reactions can lead to big mistakes – even for the savviest of investors.
And investing in real estate is probably one of the most stressful, and emotional, transactions you’ll make in your life.
What follows are three of the most dangerous real estate investment mistakes that can result in poor decisions… and how to be sure that you don’t make them.
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1. The denomination effect
Have you ever had a large bank note, but didn’t want to use it to buy anything? Yet, you had no problem using a bunch of smaller notes to pay for something?
This is known as the denomination effect. Studies have shown that people hesitate to break a $50 note, but don’t mind spending three $10 notes and four $5 notes. When the value of a banknote is smaller, it makes us feel like we are spending less.
The denomination effect can also poison the brain of real estate investors.
For example, let’s imagine that a real estate investor, perhaps one who invests in rental properties, sees a home in an attractive neighborhood that is priced well under the average price per square meter in that area.
He figures, sure, it’s probably cheap because it needs some work, but at this price, it’s impossible to turn down.
The deal is done and suddenly our investor finds he has a money pit on his hands. By the time he’s finally made enough improvements to find a tenant, months have passed and he’s spent even more than he might have buying a more “expensive†property.
That is how the denomination effect works. Prices that are low can cause behavior that results in spending as much – or even more – as would have been spent buying a property or stock with a higher price tag.
