If there is one consistent with human nature it is that we like to be right and we construct our world view to confirm to this belief. Now, most of us think “what’s so wrong with being right?” but being right sometimes really works us in the long run. Let me give an examples to show you want I mean.
Last week, I wrote about exploring on a preliminary basis investing in real estate with several other individuals. The one issue is that I have always been more confidence in investing in businesses or stock than businesses. I have this belief that investing in businesses or stock to be safer than real estate- although I have never discounted investing in real estate altogether. In my world view, investing in real estate is not wrong per se but its not right either.
On Friday, I ran some financial analysis on a best and worse case scenario on cash flow on some properties we are looking at. However, what I did was I removed appreciation from the ROI calculation and I ended up with a ROI of a paltry 3.5% which made it easy for me to say “I am right- investing in real estate is not that profitable.” (in most financial analysis of real estate you take annual profits plus some expectation of real estate appreciation, which should be equal to the annual rate of inflation at a minimal, to arrive at annual ROI) . I shared my calculations with my potential partners and one of them pointed out I missed the appreciation calculation. I don’t believe I missed this out of ignorance. I was working through a real estate ROI template that had “appreciation” clearly marked. In hindsight, I just tricked myself and missed it.
My world view that investing in real estate is not right comes from this life experience; my parents bought investment property shortly before the condo crash of the early 1990’s which caused them a great deal of stress (it wasn’t a life or death situation but it didn’t go as well as my parent’s thought in the beginning). Thus, I probably equate real estate investment with stress and I have created a world view that all real estate investing is not right because I connect this type of investing with stress.
I am not saying I will end up investing in real estate; the numbers may not work out or the timing may not be right but I am very conscious of keeping an open mind and not being right. The one thing I am going to do is vet potential investments with people with no vested interest in the investment and have experience in real estate investing as a means to “trick” myself into keeping an open mind and not be so “right/narrow minded.”
I would add this as a final comment- money is highly symbolic. For some, there are experiences of fear, insecurity or unhappiness surrounding money (their parents stressed about money when they were young, family arguments were able one spouse spending more money that another etc.) which means they approach money (making it, keeping it, investing it) with that same spirit of fear, insecurity and unhappiness. Others relate money with happier experiences- parents getting bonuses and using it to go on a family vacation with it, and they connect money with happiness. Beyond the investment products, strategies and numbers, at the end of the day, for many, money is very emotional and being able to become self-aware of the connection with money and the past is much more “profitable” than any product you could buy.