How to Turn a Losing Deal Into a Profitable Money-Making Machine
7 Ways to Transform a Losing Deal Into a Money Making Machine
Having coached hundreds of students in Steve McKnight’s training programs, I’ve had the privilege of learning from both the successes and the failures of other investors.
Early in our Property Apprenticeship course, Steve lays out some of the most dangerous pitfalls for first-time investors. One of the most common responses I invariably hear is, “I wish I would have done this course before buying that last property.”
Let’s face it. Making mistakes in real estate is easy to do. There are plenty of sharks out there that are keen to take advantage of unsuspecting first-time investors.
Even for those who are smart enough to not be taken for a ride, the waters are still dangerous. Most investors enter the property market having bought into some commonly held myths like, “negative gearing is a wise strategy,” or “once you buy, you should never sell.”
If you have a property that you now regret buying, here are seven strategies that may help you turn that losing deal into a winner:
1. Build a Granny Flat To Boost Your
Depending on where you invest, you may be able to add a secondary dwelling to increase the overall yield of your investment.
Last year I was mentoring someone who converted her existing detached garage into a second dwelling. She and her partner carried out much of the renovation work themselves on a bare bones budget, and then rented the “garage” out for $190 per week. This provided a massive boost to their income on this property.
Granny flat laws vary from state to state, so be sure to research the laws of your particular area. If you live in South Australia, Victoria, or most of Queensland, only family members can rent secondary dwellings. However, if you live in the Australian Capital Territory, Northern Territory, New South Wales, Tasmania or Western Australia, you can rent it out to virtually anyone who will pay you.
For more creative ideas, a step-by-step guide for how to get started with this strategy and the most common pitfalls, check out an article I wrote here.
2. Add Value for Your Tenant in Exchange For a Rental Increase
Tenants usually aren’t too happy about paying their landlord more money. But if you’re a landlord, you likewise should not be happy about receiving too little rent.
Many property investors grow complacent and fail to raise rents in fear of losing a tenant, but it’s actually wiser to train tenants to expect regular increases.
If you don’t raise rents regularly in line with the market, in the future you’ll find that you’ll need to increase by a large amount, just to catch back up with the market. Smaller regular increases are a much easier pill for tenants to swallow.
Even if the market doesn’t demand that you raise rents, you can still find creative ways to do so. Find out what kind of improvement your tenant wants in the property and agree to add value to the place in exchange for an increase in rent.
I wrote here about one of Steve’s students who improved his annual cash flow by $2,340 just by raising rents. All he had to do in one of his properties was install an air conditioner in the master bedroom.
3. Negotiate Lower Interest Rates And Management Fees
The same investor also improved his cash flow by $2,184 per year after negotiating a lower interest rate with his lender and lower management fees with his property manager.
First he contacted his property manager to say he was speaking to other agents in the area. At the time he was paying a six percent management fee. After gaining several quotes for five percent, he took this back to his existing property manager who lowered his rate to match the competition.
The process was just the same with his bank. He spoke to a few mortgage brokers to find out what other rates were available. Then he simply went back to his bank to have a face-to-face conversation. The bank manager matched the best rate that he found in his research.
4. Renovate the Dwelling to Increase the Property’s Perceived Value
Renovation is all about adding more in perceived value than actual cost. You may be able boost your property’s value or increase your rental yield by improving the property. This may attract a more discriminate buyer or tenant willing to pay a premium.
There are certain improvements that will bring you more bang for your buck than others. As one renovator that I interviewed shares here, you should focus on street appeal, walls and floors, and kitchens and bathrooms.
5. Subdivide the Land
If your dud property is on a larger block, it may not be a dud after all. Subdivision can be a lucrative way to add value to your property if land in the area is in high demand.
You should proceed with caution, however. Subdivision can be a lengthy, complex and expensive process.
You should enlist the services of an experienced town planning consultant to research the local council’s requirements, such as minimum lot size, storm drain regulations and sewer placement. Costs can easily blow out, which can defeat the whole purpose.
6. Offer the Property on Vendor Finance Terms
Offering a property on vendor finance terms is another strategy to boost a property’s cash flow in the lead up to a final sale. For the right buyer, vendor finance can also be a huge win, enabling someone to secure a home for purchase rather than being a renter.
You can learn more about how vendor finance works here. Laws vary from state to state, so be sure to do your homework. You’ll also want to seek the advice of a qualified and experienced solicitor.
7. Sell the Property and Move On
Sometimes you must face the fact that a bad investment will always be a bad investment. If this is the case, perhaps it would be best to sell the property, and redeploy the equity into a more profitable strategy.
Deciding to sell can be difficult for investors because of the costs involved and the capital gains tax implications, but these are not reasons to remain in a losing deal.
If you’re struggling to decide whether or not to continue holding a property, ask yourself this question: “Would I buy this property today at its current price?” If the answer is “no,” then the obvious next question is, why would you want to continue holding it?
Once you have the courage to admit that you own a losing property, the most important thing is to be sure you never make the same mistake again.
Learn from the biggest lesson of many our Property Apprenticeship students: “I wish I would have done this course before buying that last property.” Before you buy another property, be sure to educate yourself.
Here are a few questions for you to ponder:
- What did I not know when I bought my last deal that I know now? How will this information keep me from making the same mistake in the future?
- What myth did I believe about investing that led me to buy my dud property?
- What kind of due diligence should I have done that I failed to do with this property?
- Who did I allow to convince me to buy this property? What was his or her motive? Did I get taken for a ride?
Answering these questions will give you some valuable insights for the next time you contemplate a property deal. By understanding your past mistakes, you can avoid making them again in the future.