B Invested

How To Bounce Back From A Bad Property Investment

If you have purchased an investment that is costing you more than it should, it is time to reassess and take action.

However, before you can figure out how to bounce back, you need to be able to answer the following questions:

What is the problem?

Maybe you purchased an investment property that has declined in value, or one that is costing too much to hold onto each month. Either way, now is the time to stop digging and examine the hole. Map it out in terms of how much value has depreciated over time. Write out the property’s cash flow so you can stare it straight in the face. Be open with yourself about the reasons why this particular property has been a bad investment so you can find out what you need to do to recover.

What is your strategy?

Do you need properties with a strong cash flow, or are you looking to build equity? Quite often, people will invest in the wrong properties simply because they haven’t mapped out the right strategy to help them achieve their goals.

Was this property in line with my investment strategy?

If you already had a well-thought out strategy based on thorough research and a good understanding of your financial situation, it is important to question whether this property was in line with that. Sometimes, even experienced investors will make a poor judgment call and buy something they can’t afford or that doesn’t deliver in the way they need it to.

How badly is it affecting my lifestyle and financial position?

Now that you know what the problem is, dig deeper and assess your financial situation. Look at your net assets and liabilities. Examine your cash flow and establish a budget, identify your monthly spend and savings capacity. Talk to an independent financial planner to find out exactly how the problem investment is affecting your financial position.

What will happen if the market improves?

Markets can swing around. If your investment has dropped in value but cash flow is taking care of itself, it is better to hold onto it rather than sell it at a loss. Say you had purchased a property in Western Sydney at the peak of the boom in 2003. Over the next seven years, the market went backwards and sideways. After holding it for this length of time, you may have felt inclined to sell. However, if you held onto it for another three to four years, you would have seen excellent growth. By 2015, the property may have been worth double the purchase price.

What will happen if the market declines?

If you have purchased an investment property that has dropped slightly in value and is likely to drop much more, it may be better to sell it rather than hold onto it. It can be difficult to predict whether the market will drop or recover, however, if you have purchased in a poor growth location the odds may be against you. Proper research into market conditions and your own financial situation are essential before making the decision to sell. You should only sell if it won’t hurt your bottom line significantly, and you should always consult your success team first.

Do you have the right success team?

Having the right team of professionals around you can be the difference between success and failure. If you follow the advice of investment spruikers, you may end up in a worse position than you started out in. The same is true for financial planners. Unless they can offer unbiased advice, that isn’t dependent on earning large commissions or tailored exclusively to the products of just one financial institution, you will probably wind up investing in products that benefit them instead of you.

How can I learn from this experience?

Some of the costliest educational programs are that of real life. Find out what you did wrong and resolve not to let history repeat. Make sure you always buy at the bottom end of the market in good growth areas that are metropolitan. Perform due diligence and make sure you only buy affordable properties for less than market value. Draw up a cash flow analysis to determine whether the property’s rent will cover all of its expenses, and not just mortgage repayments. Assess how rising interest rates will impact this and make sure you have an accurate idea of the property’s optimum rent.

If you are in financial duress and your investment is eating into your cash flow, selling may be the only option available. If in doubt, then find out – seek the advice of trusted experts in property investment and financial planning before you make any major decisions.

For more information, visit binvested.com.au and nathanbirch.com.au