How To Fix An Underperforming Investment

Date: 12/01/2014

Strategies To Fix An Underperforming Investment

The #1 question I’m being asked at the moment is: ‘how do I turn around an under performing property’? Here’s my answer…

There are two reasons why people invest in property: to save tax, and to make money. Many want both, but as you must select one over the other, I recommend choosing ‘making money’.

This simple declaration is very important, because an under performing property meets the objective of ‘saving tax’ since the loss can probably be used to reduce your income tax, whereas a profit will increase it.

Right then, having made the decision to make money, the next question is ‘how’?

An approach that might help is to look at your properties like employees working for you. If they’re under performing then the first step is to talk to them about what’s going wrong, then you may offer re-training or perhaps ‘re-structure’ their work environment. Eventually though, if you can’t get the required results, you’ll need to let them go.

The same approach works with property: start by trying to ‘fixing the problem’, and if that doesn’t work, you might have to ‘fire the problem’.

‘Fixing The Problem’

When it comes to ‘fixing the problem’, you need to identify the effect (what’s going wrong?), and then identify the cause (why is this happening?).

For example, if your property is under performing because it’s vacant and not bringing in any income, then the cause is simple: you don’t have a tenant. The fix is to find a tenant by working out who (or what) best suits the property, what rent works for them, and then go find ’em. Go door to door if you have to.

Here’s another example: If your property is not recording capital growth (effect), then it may be that it is not ‘wanted’ by the market (cause). The fix? Make it more desirable.

Is it really so simple? I argue ‘yes’, but because there is ‘pain’ associated with dealing with the problem, the tendency is to put off taking action and this always makes things progressively worse.

Sometimes we look to others to solve the problem for us. My experience is that this seldom works. You got yourself into the mess, and you need to get yourself out of it, so roll up your sleeves and get to it!

‘Firing The Problem’

If you can’t or don’t want to fix the problem, then the only alternative (other than denial) is to ‘fire it’. No, not literally setting fire to it, but rather deciding to sell and re-deploy your funds in more profitable assets.

This sounds easy, but it’s not. Psychologically, it is extremely hard to fess up that you’ve stuffed up, and it’s more common for folks to ignore the issue and hope that ‘time and trend’ will fix the mess.

‘What To Do?’

Here’s what I’d do:

1. Do something. Blissful ignorance is not a solution if you continue to leak money.

2. Revisit your strategy. What were you trying to do, and why, when you bought the property?

3. Thinking about your strategy, figure out ‘what went wrong’ so you can avoid making the same error in the future.

4. Figure out what, in an ideal world, would need to happen for your property to be back ‘in the money’ and link that outcome to controllable and actionable tasks you (or your team) can perform.

5. Look over that list and decide what is the biggest impact item that’s easiest to implement, and get to work

– Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

hector1534 March 9, 2012 at 11:22 am
hmmm… set fire, insurance, good thinking Steve!
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DWolfe March 9, 2012 at 2:30 pm
Great post Steve,
So many people go for the 'blissful ignorance' option!
Cheers
D
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fredo_4305 March 9, 2012 at 7:47 pm
I have a renovated flooded property I am trying to sell in QLD……. no option seems to be working!!
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Marie123 March 10, 2012 at 11:29 pm
Mmmm, looks like we will be putting our IP1 on the market very shortly..
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DGHayes March 11, 2012 at 4:31 pm
Good post Steve, and that always begs the question of when to sell an underperforming asset?
With IP1, we realised that we bought at the wrong time of the cycle (learnt that from experience now). Since we have ridden the cycle down to the bottom and its now on the up cycle, we have the tendency to ride this one out for another few years to regain some of the capital loss.
If indeed we need to use those funds (and loans) for another investment sooner than later, at that time we’ll consider selling and offset that loss against the gain on another IP.
As for the fix the problem, one reason is that IP1 is under performing is its commercial office space and as such the other office spaces (same size in the building) command the rents to a degree. Now that the office space glut in Melbourne CBD is slowly eroding, we’re confident that prices will increase over the next 2 years.
I would say to an extent that we have been on the blissful ignorance side of the fence for the first few years. As you gain wisdom & experience, your evaluation of the problem changes perspective.
Perhaps as per the NRT webinars and this post have quit rightly pointed out, evaluating why you purchase the IP in the first place is key to the end game.
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