Why Emotional Investors Lose

Saturday, May 10, 2008

Read more about investing in real estate overseas in International Living Postcards —Saturday Edition

One rule for investing in real estate overseas is to buy what you like, whether it’s beachfront condos or old farmhouses. This rule can become problematic, though, when you become emotionally attached to a place...when you like the idea of the property so much that you don’t want to sell it, even though your appreciation might have peaked and your money could be better invested elsewhere.

Our property in Istria, Croatia, is a good example. We bought our old stone house here because we liked it, we liked the country, and we liked the location. The house is ready for renovation, but we haven’t had time to manage the project and it has been put aside for the past year. Meanwhile, the value of the house has gone up at least 50%, even though we’ve done no work and made no improvements. Carrying out the renovation we’ve imagined would yield some additional appreciation...if we wanted to sell. However, we bought the place with the idea that we’d use it as a summer house and rent it out when we’re not there.

The key to real estate investment profits is the exit strategy…timing the sell. You’ve got to be able to separate your emotional attachment from market cycles.

Prices in Ireland have increased 7% to 30% a year for the last 10 years, with the exception of two years. Housing appreciation in 2002 was only about 3%, and in 2007, prices were down about 7.5% on average.

I expected a plateau around 2001 or 2002. It happened, but was short-lived. Then I expected a real decline starting in 2004 (the year we sold our house in this country). But the market fooled me, showed me (and everyone else paying attention) that it wasn’t down for the count yet. Home prices in Ireland grew 7% in 2005 and even more in 2006.

I believe the long-awaited long-term fall of this beyond-bubble market has finally begun. Prices were down across the Emerald Isle in 2007 and continue to fall this year. I expect them to stay down (and possibly drop further) for some time to come.

Of course, I won’t be shocked if the Irish property market once again proves me wrong.

My point is, timing your exit from any particular property market is no easy thing.

Not only Irish markets, of course, but also most property markets around the world have enjoyed steady, even rapid appreciation over the last 10 years. Note, though, that this hasn’t been the case everywhere. Take a look at these charts for Taiwan and Thailand. The prices are up and down almost quarter by quarter.

In most cases, real estate should be a long-term investment. Try to time a market like Thailand for quick profits, and you’re likely to lose money.

This leads us back to our original rule: Buy what you like. And when the time comes to sell, ask yourself two questions:

1. Assess the market: Do you think the value of your investment could double in the next three to five years?

2. Assess your personal position: Do you enjoy using the place? Do you look forward to returning to it?

Then allow yourself to respect both points of view. If the answer to either question is yes, then you should probably hold onto the place.

I believe the answer to my first question is yes in Croatia...and I know the answer to the second is definitely yes. So we’ll hold onto our place in Croatia...and renovate it soon. You can still find your own stone house to renovate for less than €50,000 ($77,000). Of course, the renovation costs can be two to three times your purchase cost, but you end up with a customized house worth more than you have in it.

Lief Simon
For International Living

Editor’s note: If you want to know where else in the world your investment could double in the next three to five years…in a destination you’ll enjoy returning to…read this report about how easy it is to get into global real estate investing.

Read related articles:

- Beware of Investing With the Masses

- The Truth About Investing in Panama City

- Never Trust Your Overseas Real Estate “Friend”