No one enters into a real estate investment hoping or expecting the deal to go south, but unfortunately, not every investment turns out profitably. Thorough due diligence, proper management, and careful underwriting of the investment prior to buying reduces the likelihood of a bad real estate investment, but some factors are out of your control. If you have a deal that's gone sideways, here's what to do next.
Determine the problem
When you start to notice an investment is going badly, the first thing to do is figure out what the problem is. A number of factors can negatively affect the profitability of an investment. These include market corrections like a recession; a shift in supply and demand that adversely affects values, rental rates, or occupancy rates; or having a tenant or borrower stop paying, trash the place, or breach the contract in some form or fashion. Litigation between parties, title defects, environmental issues, and unexpected repairs or major construction issues with the property can quickly eat up any profits.
From there, determine what possible solutions exist for your specific problem. If the property has sat vacant longer than expected, you may want to consider offering incentives, adjusting lease terms, making improvements to the property to better compete in the marketplace, or lower the asking rent.
If the property incurred higher rehab costs than originally anticipated or has other big issues that require more money to fix or remediate and is now underwater, you may want to consider holding it as a rental property or selling with a sandwich lease to recoup your investment over time rather than selling now at a loss.
If the property is in an oversaturated market where demand is low and unlikely to return, it may be worthwhile to adapt the property through adaptive reuse. If you'd rather just be done with the bad investment, get creative with your method of selling. Consider selling with owner financing so you can recoup some of your losses over time while reducing your tax burden. If you've financed the investment property, seeing if you can sell the property subject to the current mortgage is a possibility.
The best way to deal with a bad investment: Avoid them from the start
I don't know any real estate investor, or any investor in general, that hasn't had an investment go badly at one point in their investment career. Hedging that risk before you buy with thorough due diligence, professional management, and staying on top of market conditions to prepare and adjust before a downturn or negative impact are a few ways to reduce the likelihood of a deal going bad.
In most cases, there's an alternative to unloading the property at a reduced price because of its performance or issues, but in some cases, that can be the best solution. When that happens, chalk it up to a lesson learned. Take note of what the problem was and what could have prevented it, and make sure you never make that mistake again.