I Made a Bad Real Estate Investment. Now What?
Nobody makes a real estate investment hoping or expecting the deal to go south, but unfortunately, not every investment is profitable. Thorough due diligence, proper management, and careful drawing of the investment before buying it will reduce the likelihood of a bad property investment. However, some factors are beyond your control. If you have a deal that has gone sideways, here’s what to do.
Identify the problem
If you find that an investment is doing badly, the first thing you need to find out is what the problem is. A number of factors can negatively affect the return on an investment. These include market corrections like a recession; a shift in supply and demand that adversely affects values, rental prices or occupancy rates; or if a tenant or borrower stops paying, trashes the place, or breaches the contract in any form or manner. Litigation between parties, property defects, environmental issues, and unexpected repairs or major construction problems with the property can quickly gobble up profits.
From there, determine what possible solutions exist for your specific problem. If the property has been vacant for longer than expected, you should provide incentives, adjust rental conditions, improve the property to better compete in the market, or lower the required rent.
If the property has higher rehab costs than originally anticipated, or has other major issues that require more money to fix or refurbish and is now underwater, consider keeping it as a rental or sandwich leasing to sell to Time to recoup your investment instead of selling at a loss now.
If the property is in an oversaturated market, where demand is low and a return is unlikely, it may be worthwhile to adapt the property through adaptive reuse. If you’d rather just deal with the bad investment, get creative with your sales method. Consider selling with owner financing so you can recoup some of your losses over time while reducing your tax burden. Once you have financed the investment property, it is possible to see if you can sell the property with the current mortgage.
The best way to deal with a bad investment: avoid it from the start
I don’t know of any real estate investor, or an investor in general, who at some point in their investment career didn’t have a bad investment. Hedging against this risk before buying with thorough care, professional management, and following market conditions to prepare and adjust for a downturn or adverse impact are some ways to reduce the likelihood of a business going bad.
In most cases there is an alternative to unloading the property at a reduced price due to its performance or problems. However, in some cases this may be the best solution. When that happens, chalk it up into a lesson you’ve learned. Take note of what the problem was and what could have prevented it, and make sure you never make this mistake again.