When you make decisions you think things through and tend to have a ‘gut instinct’ about whether the decision is right. Sometimes a decision might be based on instinct, rather than what the logic of our brain tell us.
‘Gut instinct’ or intuition accesses accumulated experiences in a synthesised way, so that judgments are formed and action taken without any logical, conscious consideration.
Think about when you’ve gone to view a property, you might instantly take a like, or dislike, to it from the outside. It may look old fashioned, ugly and run down from the outside and you may know from past experience that this is a good indicator, that the inside is likely to be in bad shape. So your ‘gut’ or intuition, tells you that, based on previously seeing neglected properties this won’t be for you if you don’t want to do any renovation work.
Yet another investor might be drawn to the ugliest properties, perhaps because based on past experience they can generate the highest yields and cashflow if they are in the right area and serving the right tenant type.
These situations create an ‘emotional tag’ linked to a previous experience which influences decision-making, more than objectively assessing the pros and cons of a situation. This means that to protect decisions against bias, you first need to know when you can trust your gut feelings, confident that they are drawing on appropriate experiences and emotions.*
So when can you trust your gut during property investing?
We often push ourselves outside our comfort zone to achieve things we haven’t achieved to date. This can sometimes create the same sort of feelings of unease we feel when we are about to make the ‘wrong’ decision.
So how do we tell the difference?
I talk a lot about Due Diligence, in essence doing the research and checking things out before making an investment decision. This can play an important role in helping understand if we are feeling uncomfortable because we are stepping outside our comfort zone or because there is a real cause for concern.
Role of Due Diligence on property investment decision-making
Before you part with any money, or sign any legal contract requiring future payments, then it is key that you carry out appropriate checks not only on your potential investment, but also on anyone you might be investing with and the professionals you might use along the way.
Whether that be visiting the local area and comparing comparable prices, rental returns, taking stock of the infrastructure, transport links, schools and health care or checking out a developer’s or builder’s reputation, as well as all the legalities.
So once you have checked things out and taken an objective view of the investment opportunity you can use this to supplement your subjective ‘gut instinct’ and check if the gut instinct is based on:
- identical or similar situations and whether you have experienced this feeling sufficiently to know that the gut instinct is sound?
- whether you learned the ‘right’ lessons in the past or are not remembering the situation accurately
- over-reliance on someone else’s judgement to form your decision, who will have a different set of experiences and judgments.
There is a place for pushing yourself outside your comfort zone as well as using ‘Gut Instinct’ in property investment. The key is to use due diligence tools and techniques to introduce objectivity to the decision-making process and distinguish whether that gut feel of unease is because you are trying something new or because there is a genuine, logical reason for it.
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My business focuses on helping time-strapped expats and busy business people who don’t have the local presence, or capacity, to acquire the ‘right’ properties for them. Property Venture® is an award-winning, Boutique property consultancy that finds the right investment properties for clients.
* Strategic decisions: When can you trust your gut?” published by McKinsey Quarterly in March 2010 based on Nobel laureate Daniel Kahneman and psychologist Gary Klein workTags: Buy to let, Due Diligence, investment property, Risk & Reward