We hear a lot about risk, but what is risk?<\/p>\n
In any finance class, you will hear about two types of risk:<\/p>\n
Related:<\/strong> 3 Ways to Deal With Real Estate Risk Without Letting it Paralyze You<\/a><\/em><\/p>\n While these risks are important to understand, one type of risk can multiply the severity of market and investment specific risk.<\/p>\n Emotional risk.<\/strong><\/em><\/p>\n So what is \u201cemotional risk?”<\/p>\n Emotional risk: Decisions guided by emotions rather than investment principles.<\/p>\n I\u2019ve read numerous stories about real estate tragedies. A common theme among these failures is a lack awareness of emotional risk. Real estate investing is a long term journey. Unfortunately, many people are shaken out of the game before they can gain vital experience necessary for success.<\/p>\n Emotions are what make us human. The love you feel for friends and family, and the hatred you feel for cable companies. But too much emotion can cloud your judgement. Now, we can\u2019t turn ourselves into robots and assume we will never make emotional decisions, but we can identify our emotional triggers to recognize when we are in the grips of emotion.<\/p>\n Emotional risks takes numerous shapes and sizes. Everyone handles their emotions differently, so there\u2019s no one-size-fits-all policy. The best way to control emotional risk is to have a deep understanding of possible triggers causing emotions to run rampant. By having this awareness, you can decrease the power your emotions have over your investment decisions.<\/p>\n “If you cannot control your emotions, you cannot control your money”\u00a0– Warren Buffett<\/p>\n<\/blockquote>\n To summarize most newbie investment goals: GET RICH! Define “rich.” Do you define rich as being able to buy whatever you want? Do you mean early retirement? Or being able to turn off your cellphone after work so you can spend time with your kids? Will more money fix your current spending issues?<\/p>\n Do you believe investing in real estate will help you solve your personal problems? Are you telling yourself the grass is greener in real estate investing because you can run away from your problems? Do you think you won\u2019t have to work anymore once you begin investing in real estate?<\/p>\n Do you tend to be a negative person and find all the weaknesses in a deal? Or does your positivity blind you from potential risks? How do you handle setback? Are you someone who has a low emotional boiling point?<\/p>\n Do you feel a need to immediately jump into real estate investing because you missed a \u201cgreat opportunity?” Do you find yourself saying, \u201cI\u2019m not expanding my housing portfolio fast enough\u201d?<\/p>\n Do you personally tie your self esteem to the value of your investments? Are you comparing your investment success to others? Do you find yourself saying you\u2019re better than other investors and you can handle riskier investments?<\/p>\n \u201cWhen a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.\u201d –\u00a0Warren Buffett<\/p>\n<\/blockquote>\n Have you sat down with your partner to discuss the time commitment involved in real estate investing? Have you met with anyone who\u2019s involved in real estate investing? What are the repercussions leveraging yourself to the hilt for a \u201csweet deal?” What happens if you\u2019re unable to manage your investments? How will your family take care of them?<\/p>\n Do you understand the difference between controlled, steady growth and rampant growth? Steady growth can be maintained without destroying the integrity of your systems and allowing you to stow away enough cash for a rainy day, improve systems, and strike when a good deal appears. Or are you driven by the latest \u201cgame changing\u201d fad and are you\u00a0willing to risk it all for a short term gain? To learn more about rampant growth and its destructive power, check out Podcast #1.<\/a><\/p>\n\n
Triggers of Emotional Risk<\/h2>\n
Failing to Clearly Define Your Personal Real Estate Goals<\/h3>\n
Thinking Real Estate is a Salvation to All of Your Problems<\/h3>\n
Lack of Personal Awareness of Your Emotional Climate<\/h3>\n
Unnecessary Time Pressure<\/h3>\n
Investing Your Ego Instead of Capital<\/h3>\n
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Poor Family Planning<\/h3>\n
Failing to Understand Not All Growth is Created Equal<\/h3>\n