Making a good real estate investment takes time and patience. It takes effort and experience to really understand what makes a good long-term investment. However, bad investments are bound to happen, especially if you’re a first-time real estate investor. With the right guidance, any investor—be it a green or experienced one—wouldn’t consider a bad real estate investment as a total loss.
Even top real estate investors learned the ropes at some point, so a bad investment isn’t necessarily the end of the world; you just need to learn how to turn it into a good one.
How do you turn a bad real estate investment into a profitable one? Here are 4 real estate investment rules to consider:
- Understand your costs and risks
- Carefully plan a strategy
- Know when to cut your losses
- Learn from your mistakes
Understand the costs and risks
Your goal is to achieve the highest return on your investment, but sometimes, that is not the outcome. Property maintenance and upkeep can drain your funds, the home may require costly repairs, or you may not find a tenant to help generate rental income.
No one wants their investment to turn into a money pit. While many novice investors understand the risks associated with their investment, they might underestimate the various actual and potential costs. Renovations and repairs can cost quite a bit of money, especially when it comes to properties that require a lot of work at the outset.
Understand maintenance and construction costs, as well as the current state of the housing market. Research and expert consultation are essential steps to gain a better understanding of what is possible with a particular property.
With the right know-how and understanding, you can develop a plan to minimize your losses while boosting your gains. First, any investor needs to determine the reason their current investment is going south. Are the maintenance fees too high? Does the property require too much upkeep or repair? Do you have tenants, and are they paying what you’ll need to be a profitable landlord?
Asking yourself these questions will lay the groundwork for your plan. If you don’t have tenants, how will you find them? If the property requires too much upkeep for you to handle yourself, have you considered hiring extra help? A carefully laid-out plan will help you make the most of your real estate investment.
With a plan, you can tackle any potential problems head-on. However, you need to consider if your investment is worth keeping. If you’re looking to a sell a property that you may view as a bad investment, how could you get the best ROI possible? Is fixing all of the problems with the property worth the trouble? You always need to consider the worst-case scenario, so it’s absolutely vital to have an exit strategy.
Cut your losses
While we all want to justify our investments, find the silver lining and make the best of a bad situation, sometimes the best thing to do is to cut your losses. However, novice investors, and even sometimes experienced ones, come across what is known as the “sunk cost fallacy.”
For those unaware of the term, the sunk cost fallacy refers to our ability to commit to something—like an investment—even though the best course of action would be to stop committing. People are prone to various biases that can often cloud their judgement.
The sunk cost fallacy is one of these biases that many investors fall victim to. For example, a homeowner purchases a large property that is littered with issues. On top of these problems, they also have to spend a significant amount of time and money maintaining the property on a weekly and monthly basis. Instead of cutting their losses and selling the property, they invest heavily into fixing the numerous problems with the house, while constantly keeping up with the strenuous maintenance.
Since it’s easy to fall subject to bias, many investors need to know when to cut their losses. Investments can often be bad, but the best thing to do at times may be to drop the investment altogether. Going into an investment with an “all-in” mentality is financially dangerous; don’t lose more than you already have.
Learn from your mistakes
Even experienced investors are exposed to bad investments, so don’t beat yourself up if you make a mistake—especially if you’re a first-time real estate investor looking to get things right.
Every investment is an opportunity to learn, regardless of the outcome. When you make a profitable investment, you’ll know the various intricacies that led you to success. The same applies to a bad investment. Next time, you’ll know what to watch out for, and how to handle “surprises.”
So, whether you’ve made a good investment or a bad one, it’s important to take the time to reflect on what made the investment what it is, and what you can learn to apply to future opportunities. While you may lose some money in the process, you will have gained some knowledge on how to better invest in real estate.
Overall, the key to turning a bad investment into a good one is to take the time to think about what can and needs to be done. Turn to an experienced real estate professional for advice on associated costs, risks and market trends that would affect the purchase and the potential for return.
Regardless of how everything is resolved, you should always learn from every investment. In doing so, you can make well-informed decisions through smarter investments. Since real estate investments can be quite the profitable gamble, it’s worth learning how to spot good investments from bad ones, and how to turn even risky properties into a return on your investment.