Why Emotion is The Enemy When Investing in Luxury Real Estate

Practically every successful investor will tell you that emotion should have no place in the decision-making process. Fear, greed, and impatience are your greatest enemies; regardless of whether you’re speculating the stock market, foreign currency exchange or luxury real estate.

The behavior of investors in and around the Global Financial Crisis exposed the weakness in the human psyche; the inability to detach ourselves from our emotions when the going gets tough.

As a result, investors purchased properties when prices got too high, and they were destroyed as the market crashed. That over-optimism soon turned to fear. As a result, people were swayed by their emotions and failed to take advantage of rock-bottom property and stock market prices. Impatience routinely sabotages an individual’s investment plans as they buy too soon or sell too quickly, or bet on big gains, instead of making sustainable long term plays. Warren Buffett puts it best, “you have to be greedy when others are scared, and scared when others are greedy!”

Luxury Real Estate – Want versus Need

Most of the rules of investment remain unchanged irrespective of the market, though luxury real estate can have its own nuances. In all levels of real estate, emotion is always a factor, whether you like it or not. For the vast majority of buyers, purchasing a home is by far the biggest investment they will ever make, so it has to ‘feel just right’.

Often investors are driven by what they ‘want’ as opposed to what they ‘need.' For example, you might want to buy a luxury condo because it makes you feel powerful, sexy or wealthy. You want to feel as if you’ve ‘made it’ and a stunning seven, eight, or nine-figure property is one sizable status symbol! Alternatively, there can be highly practical advantages to owning luxury real estate. These purchases can be understood as an investment to help build your brand and maximize your personal productivity.

Sometimes, the more disposable income you have, the easier it is to justify overpaying for an ‘emotional’ spend. This understanding of the consumer psyche is why developers are constantly pushing higher prices, and speculators like Bill Ackman are willing to splurge on $100M penthouses to claim title to being the biggest spenders, with hopes of flipping for $500M in the future.

The Second (Or Third Home) Trap

Second and third homes can make great investments. However, it is important to separate investing from acquiring more ‘toys’. When you’re buying an additional property for investment reasons only, there are many factors to take into consideration. It is far too easy to slip into the mode where you look at the property as the kind of place where you would like to live.

Instead, consider the needs and desires of those in the market for luxury property, and consider financial influences, including holding costs. It is advantageous to know the tax benefits (or lack of them) when holding a second home and ensure it is a sustainable investment that you can hold long term.

Focus on the Numbers

If you get too emotional about a property, you will almost certainly overpay for it, or hold it for too long.

Be realistic about value, holding costs, potential markets twists, and income opportunities. Analysis conducted by Forbes and Local Market Monitor suggest that Florida is one of the best locations for luxury real estate investment in the United States. Projected average home price growth will exceed 25% in cities such as Tampa, Jacksonville, Orlando and West Palm Beach. It is important to consider these and other market trends, while also staying objective in evaluating the return on investment, demand for high-end rentals, and when it’s prudent to make improvements.

Final Words

While it is almost unavoidable to let emotion seep into your transactions, allowing emotion to overrule sound decision-making has no place in the world of luxury real estate for those making true investments. A cool, calculated approach is required if you hope to make a substantial profit. If you are purchasing a property you will use, make sure it offers the features that will maximize your own peak performance.

If you are purely investing, it is always wise to get first-hand information from a local market expert who can help back up your assumptions with hard data. If you are interested in learning more and investing in the luxury real estate market, contact Tim Elmes today. 

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