Investing Basics

What to Do if You Made a Bad Real Estate Investment

What to Do if You Made a Bad Real Estate Investment
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It happens all the time: sometimes, no matter how carefully you research, plan and acquire financing, you may find yourself sitting on a bad real estate investment. While real estate investing is considered a pretty safe way to make your money work for you, there are inevitably surprises in the market, the country and the world as a whole. (For example, who saw the COVID-19 pandemic coming?)

Table of Contents - What to Do if You Made a Bad Real Estate Investment

If you’ve made a bad real estate investment, don’t beat yourself up. It’s rare to get it right 100 percent of the time. Now, the only thing that matters is how you’ll handle it.

With a little analysis and strategy, you might even be able to turn your bad real estate investment into a good one. Here’s how to do it.

Decide what went wrong

Usually, the answer to “what went wrong?” is pretty obvious. Maybe your brand-new apartment building isn’t attracting tenants, or your fix-and-flip’s neighbourhood took a nosedive in the time it took to get the house ready. Sometimes you miscalculated just how much it would cost to keep your property in good shape, or the tax burden is higher than you thought it would be. Whatever the problem is, you need to get a clear picture of what went wrong.

Once you know where the problem is, you can make a plan to fix it. For example, if you’re having trouble attracting tenants, dig deeper. Is the rent too high (or too low) for the location? Is your marketing effective? Does your lease include too many restrictions? Are you having trouble managing the property on your own? All of these questions will help you get to the root of the issue.

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Find out what it would take to turn your investment around

Obviously, you don’t want to sink more money into a bad investment—but sometimes, more money can indeed fix the problems. For example, if your building has problems that, when fixed, are guaranteed to bring in tenants and above-market rent, it might be worth it to shell out the extra money to fix the problem. Similarly, if marketing, upkeep or management is the problem, you’d be wise to do a cost-benefit analysis. You may be able to hold on to the property and make it profitable with a little extra cash.

If you decide to turn the investment around, make sure that you know exactly how much you can spend and when you should expect to see it pay off. For example, properties with plenty of interested buyers or tenants might be worth investing extra funds. On the other hand, if you’re not sure you can get the rent or purchase price you need, even after your remediation, it might be best to cut your losses.

Consider just cutting your losses

It’s hard to sink a lot of time, energy and money into a project, only to see it fail. Many inexperienced investors make the mistake of continuing their efforts and improvements against all odds. After all, they’ve already given so much of themselves (and their wallets). This is called the “sunk cost fallacy,” and it occurs in everything from real estate investment to bad relationships.

Think of it this way: would you rather take a loss on this property and reinvest the proceeds in something with a better chance of succeeding, or do you want to put more money and time into a floundering effort?

It’s not easy to admit defeat, but in some cases, it’s the best solution. There’s no sense in losing even more money, especially if you can’t afford to do so. When you’re in doubt, ask your partners or a neutral third party what they think. Taking a step back can make the path forward clear.

Look at it as a learning experience

Sometimes failure is the best teacher. You’ll probably avoid making the same mistakes in your next investment—and if it’s an act of God to blame, you can rest assured that it probably won’t happen again. (Alternatively, you might invest in better insurance!)

There is plenty you can learn from a bad real estate investment alone, but if you want to improve your knowledge and refine your techniques, here are a few solutions;

Find mentors

If you haven’t found a great real estate investment mentor, now is the time to find one. No matter how many articles or books you read, there’s nothing like personal guidance from someone who has already been there. Many investors are all too happy to help colleagues avoid their biggest mistakes.

Join investment networks

One way to stay on top of local trends and learn more about real estate is to join networking groups. Look for local meetups and come with your business cards, ready to learn. You might even find a new mentor.

Work with respected professionals

Sometimes, your real estate agent, property manager, attorney and partners can make or break your investment. Thoroughly vet the people you work with—networking is a great way to find the right professionals.

Take classes

Finally, consider taking classes to improve your knowledge. Community colleges and professional associations often offer workshops and classes on various real estate investment subjects.

In conclusion…

If you’ve made a bad real estate investment, it’s not a referendum on your research, skill or business acumen. Bad investments happen despite our best efforts, and it can happen to anyone. Following these tips will help you critically analyze your investment so that you can either turn it around or cut your losses and move on to the next one. Some investors might even see it as a hidden opportunity to try a new type of real estate investing and refine their methodology. Whatever you choose to do, don’t let it stop you from developing a great investment portfolio. Real estate is a relatively safe way to invest your money. As long as you’re committed to learning and growing, there’s no reason you can’t try again and use your experience for the better.

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