Real Estate Property Investing: Know When to Cut Your Losses - 5 Arch Funding

Real Estate Property Investing: Know When to Cut Your Losses

Posted by Steven Davis on June 22, 2017

You have a pretty good residential real estate investing track record, but there is one property that just is not pulling its weight. You have stayed with it a while, hoping to turn it around, but it is taking longer than expected. You are beginning to lose faith that it will ever be a moneymaker. Should you stick with it, or take a loss on the property?

“Certainly there is not one single definitive answer to that question,” says Shawn Miller, CEO of 5 Arch. “You have to evaluate the property based on how much you have already invested in it, how much of a loss you are taking on a monthly basis, and how long you can sustain the loss. You also need to consider what else you could be doing if you were able to free up your capital from this underperforming investment property.”

Evaluating the Potential

As an example, let us say you are renting the property to a tenant whose lease will expire in three or four months. Once the lease is up, are you in a position to raise the rent sufficiently to mitigate the loss or to get to break-even? Can you do a few cost-efficient updates—perhaps put in new appliances or turn a sunroom into an additional bedroom—to justify a boost in the rent?

On the other hand, you do not want to throw good money after bad. So, if the property is turning into a money pit with plumbing or other repair costs seriously cutting into your cash flow, it might be time to move on. “There are likely to be other properties that will meet your needs much more than the one you are hanging onto,” Miller says.

Look at Pricing Trends

To evaluate the outlook for this property, Miller advises that you carefully study the pricing trends for the zip code in which it is located. “Has the market been stagnant but prices are suddenly picking up?” he asks. “That may be a reason to stick with the property a while longer.”

Depending upon when you bought the property, you might be underwater in loan-to-value, and giving it a little more time might improve your situation considerably. “Timing is everything, and if you wait to sell at the right time, what initially seemed like a loss could turn around for you and allow you to walk away with a modest profit,” says Miller.

However, do not wait too long. Remember: The money you leave tied up in an underperforming property is money that you are not able to invest elsewhere.

“If you come across a property that is likely to perform better for you, then it could make sense to get out of your current situation to free up the funds you need to make a better investment,” Miller advises. “Even though you are taking a loss in moving away from your current investment, the ability to put the money in a better-performing property could pay off for you in fairly short order.”

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