Investments should be considered financial decisions. Finance classes teach us how to evaluate investments and make decisions. In real life, however, many people make investment decisions based on emotions. Real estate investments are no exception to this rule. Many people feel emotionally attached to their homes. They make decisions that are not necessarily financial or mathematical. We will be listing some behavioral motivations behind real estate decision-making.
Buy a property as a Rite of Passage
Most people consider a property an emotional investment. Young people are more vulnerable to this. This segment is growing fast and includes individuals and couples in their late twenties or early thirties. These are those who are either newly married or about to marry.
They believe purchasing a home is essential in their journey to adulthood. Their grandparents and parents bought a house when they were married. They associate purchasing a home with the beginning of a family.
Buying a house is a way to start a family. This tendency is well-known by developers who create entire marketing campaigns to encourage these emotions. But, successful real estate investors know that investing is a financial matter. Mixing emotions from family members in the process can make it more complicated and lead to poor investment decisions.
Everybody Does It: Buying a Home
Many people view buying a home as a sign of economic success. After graduating from college, many people purchase a mortgage to finance their home purchase. Emotions are again at play when it comes to investment decisions. They see buying a house as a public declaration of their success in life.
Thus, the house is a symbol of success. This tendency has been recognized by developers once more. They have therefore built many suburban homes with luxurious amenities for middle-class families. This is the idea of giving middle-class buyers a sense of aspiration and validation that they are indeed successful.
Buy a property because someone earned millions in the past
There has been a boom in real estate over the past few decades, except for a few. Stories of people who suddenly had everything and became millionaires due to the large tracts of land they owned are familiar. People who own large amounts of land for farming have become wealthy due to urbanization.
Another group of investors is now looking to replicate the experience. One thing is different. They expect real estate prices to appreciate at the same pace as in the past. Anybody familiar with economics or real estate will know that exponential growth at high rates can only continue for a short time. Globally, the outlook for real estate is bearish. These investors believe that the market will rise indefinitely because of their greed. Their decisions are not based on sound financial analysis. They are more driven by emotions and the rush of the opportunity to quickly make a lot of money.
Buy a Property Using Tax Advantages
Tax advantages are another reason that middle-class buyers use to buy homes. There are tax incentives available from all countries for purchasing a home. These allow the borrower to deduct some of the amounts they have paid in interest and capital towards their mortgage from their income, thereby reducing both the payment and tax owed.
This makes real estate investing seem attractive. It does offer some upsides in the form of capital appreciation and cash flow. It also allows investors to save money due to a lower tax bill.
In reality, this is not true. The government offers tax breaks that are negligible compared to mortgage interest. If we take a financial look, buying a house may not make sense. Many investors find the perceived tax benefits to be appealing emotionally.
The land is scarce, so you should consider buying a property
Developers also make it a point to scare the public by claiming that there is a shortage of land and that the world population is increasing. Hence, falling supply should be met with rising demand. This should lead to appreciation. This argument needs to be revised in several ways. First, despite the considerable population growth, enough land is still available to accommodate all the people. This can easily be repeated many times! We are not even close to a shortage of land. The population has stabilized in recent years, so the demand for real property will not increase at the same rate as it did before. It is a false argument to purchase land because there will be no more.