Morgan Housel’s book “The Psychology of Money” offers invaluable insights into our human psychology when it comes to finances. While the book primarily delves into general principles of wealth management, its lessons can be seamlessly applied to real estate investing. Here are five key takeaways from the book and their relevance to real estate investment:
In a capitalist society, the pursuit of “more” often dominates our financial decisions. However, this perpetual chase for more can be perilous. In real estate investing, it’s vital to understand that having one or two paid-off income properties in a prime location, like Toronto, can significantly contribute to your financial freedom. There’s no need to be distracted by the desire for more properties in various cities or provinces. Quality often surpasses quantity when you have a clear understanding of your financial goals.
Power of Compounding
Warren Buffet’s wealth provides a remarkable example of the power of compounding. He accumulated $81.5 billion of his $84.5 billion net worth after the age of 65, starting his investment journey in his thirties. This emphasizes the importance of patience and staying the course. In real estate investing, it’s akin to holding onto your duplex or triplex for an extended period, such as 15, 20, or 25 years. Over time, property values appreciate, mortgages get paid down, and the equity accumulates. A property bought for $1 million, appreciating at 5% annually, could be worth $1.276 million in just five years, demonstrating the power of long-term commitment.
Getting Wealthy vs. Staying Wealthy
Successful investing is often more about consistently avoiding mistakes than making spectacular gains. In real estate, it involves meticulous planning for property maintenance, tenant management (having a reliable network of professionals for consultation is crucial), and being prepared for a downturn in the rental market, as seen during the pandemic. During challenging times, the focus should be on retaining your investment properties, even when rents dip. Planning for the worst-case scenario can save you from selling at a significant loss.
Wealth is What You Don’t See
Housel’s notion that wealth is often hidden from plain sight resonates with the world of real estate agents who often showcase extravagant lifestyles on social media. In real estate investing, it’s essential to recognize that keeping up with an extravagant portfolio of 20 investment properties is unnecessary. Staying on course and focusing on a well-selected few can lead to long-term success. Avoid distractions and stay committed to your financial objectives.
Earning a high income is significant, but equally important is how much you save. Saving money offers financial flexibility and security. It can help you weather a downturn in the real estate market without making hasty decisions. Savings can be used to cover expenses during periods of lower rental income, and they provide the option to pay down mortgages. The ability to save positions you in a powerful financial stance.
These are the initial five takeaways from “The Psychology of Money” and how they relate to real estate investing. Stay tuned for more insights on how these principles can be applied to your real estate investment journey.
Pritish Kumar Halder is an experienced real estate professional with a deep understanding of real estate investing. His expertise extends to market trends, financial strategies, and property analysis. Pritish is dedicated to helping individuals make informed decisions in their real estate investment endeavours.