Short-sighted investors vs. the big picture
Written by M. Jane Garvey
In a society where instant gratification is the norm, it can be difficult to think about long-term planning and the benefits of delayed gratification. But as investors, that’s exactly what we should do. Taking the time to consider the consequences will almost always pay off in the long run.
Myopic behavior, or myopia, often leads people to make impulsive decisions or take unnecessary risks. To avoid such behavior, we must learn how to consider the long-term consequences of our actions.
One of the most common examples of myopic behavior is when a housing provider makes a rental decision to a barely qualified tenant. Vacancies are economically painful. So, to avoid the short-term pain of not having rental income to pay the bills, housing providers take a gamble by renting to people who are likely to fail. The short-term benefit of no vacancy can lead to long-term costs and pain of eviction and all the losses and damages that come with it. Experienced housing providers will always tell you to wait until qualified applicants arrive. A stopgap solution is rarely the right choice.
Buying inferior parts and tools just because they are cheap is also an example of short-sighted behavior. If a plumbing part breaks, when should it be replaced? How much will it cost to have it replaced? Worse, how much will it cost to repair the damage caused by the failure? Should you consider these costs when making your decision? Cheap isn’t necessarily cheap in the long run.
Ignoring small “leakages” in cash flow is a big mistake. Let’s say you’re spending $100 more each month than your insurance premiums. If he makes the necessary changes to his insurance and invests his new cash flow savings at a 10% interest rate, he will earn $20,484.50 over the next 10 years. If you invested for 30 years instead, you would have $226,048.79. The short-sighted action of not finding the time to fix “leaks” can be very costly in the long run.
Avoiding unforced errors is necessary to survive in the real estate business. Ignoring market conditions is one such mistake. Ignoring government orders is another thing. Violating the precautionary advice of long-term investors is yet another. You need to think long-term and proactively adapt your strategies to survive in the long term.
We’ve seen seemingly very successful investors rebuild and resell properties while interest rates are low and buyers are competing for properties. In order to find deals to bring to market, some of these investors began making decisions that were only viable in ideal market conditions. They squeezed their profit margins, started counting on market increases, bought homes in undesirable locations and with undesirable floor plans, cut corners on rehabs to save money, and did other similar things. This short-sighted behavior ultimately creates problems when the market changes.
In some parts of the country, the rental real estate business is under attack. Housing providers are required to take risks with potential tenants who are likely to be unable to meet their obligations under the terms of the lease. Rent is regulated through rent regulations. Taxes and regulatory costs are increasing and profitability is shrinking. These cases demonstrate short-sighted behavior not only by governments but also by investors who choose to continue operating in these areas. Laws that discourage investment may provide short-term benefits to current residents, but in the long run, housing shortages hurt everyone. Investors who choose to stay in areas where their business is under attack are like ostriches with their heads buried in the sand. Problems are upon them, but they are either blissfully unaware, or think that if they can’t see them, they can’t see them either. . This short-sighted action can have dire consequences.
When you’re excited to learn about investing, prudent advice from longtime investors can seem discouraging. Like an ostrich with its head in the sand, some beginners don’t want to hear it or see it. This advice will give you a long-term perspective and dramatically increase your chances of long-term survival in this business. To navigate the waves of market change, it’s best to rely on some guidance. Join your local investor association and spend time getting to know long-time investors. Their wisdom will help you make wise decisions that consider long-term implications.
Learning about alternative strategies that can help you adapt to market changes is also something that myopic thinkers ignore. It’s time to learn before you need it. It’s important to make sure you have a backup plan for your investment. Real estate isn’t as liquid as many other investments, so you need to know how to adapt to situations and be able to change your strategy when things don’t go well. Many offices, shopping malls, and other commercial facilities are currently experiencing major vacancy problems. In some areas, short-term rentals are under legal attack. Investors who have alternative usage plans are more likely to survive these changes.
Diversification is also an important part of long-term survival. Making different investments in different types of real estate in different locations reduces risk. Still, you should take the time to periodically review your holdings and the viability of the market in which they hold them. This approach allows you to make the necessary transitions when the problem is at hand.
Think long-term, act long-term, survive long-term, profit long-term
Jane Garvey is Chicago Creative Investors Association.
