It’s hard to admit that you messed up. It’s even harder to admit the mistake, have it cost you month after month, and then just walk away from it (in my case, by selling the property at a loss). It’s almost like fighting a gamblers impulse – if I just put in a few more dollars this machine will pay out.
I did it for years with one of my Niagara Falls investment properties. After initially getting the properties for next to nothing, I shelled out a lot of money year after year for repairs, court fines and more repairs. I took out a line of credit to cover the extra expenses.
The area in Niagara Falls where the properties are located has been improving. A nice Motel 6 went up across the street. Land has been bought all around the area for new development. I kept thinking if I could just hold on to the property for a few more years I would hit the jackpot and be holding very valuable land. I thought if I just fixed it up, I would attract better tenants and would have an easier time with it. Bottom line is that I just kept thinking if I put a few more dollars in that slot machine I would eventually win big.
Here’s just a sample of the problems/issues I had with this property, and why I chose to sell at a loss rather than feeding the nasty slot machine:
- It was costing me a lot of cash every month to service all the expenses;
- It caused me and my wife considerable stress with all the problems it always seemed to have;
- After my new property manager helped to evict the bad tenants, he couldn’t get good ones to replace them;
- No matter how much work and refurbishing we did, there always seemed to be another problem;
- Although the neighbourhood was getting better, it was improving at a snail’s pace.
Hopefully by reading our other real estate investing stories, you will learn enough lessons that you don’t end up with your own troublesome properties, but if you do and you find yourself unhappily evaluating the situation regularly, know that it’s OK to sell your property at a loss, especially because:
- Assuming you make money on the sale of another property within the next seven years, the capital losses from the sale of the money-loser will make a nice good offset for capital gains you realize in the future.
- Continually throwing money at a problem waiting for it to magically become a winning investment is foolish. Yes, some people get lucky but hoping you are going to be a lucky one is not really a good strategy.
- Stress is bad for your health and for your relationships. If selling the property, even at a loss, will rid you of a lot of stress then it’s worth it. What good is building a big real estate portfolio to be rich from, if you’re not healthy enough to enjoy your wealth?
- Owning a negative cashflow property not only costs you money out of your pocket, but can hurt your chances of financing other investment properties because you may not be able to service the debt on the new property.
So, when the deal closed we went out and celebrated it’s sale. We would have rather made money on the deal. But we were just happy to be able to take the lessons from that ordeal, and walk away. We couldn’t toast with the finest wines or the best foods because that deal didn’t make us rich, but we could smile that our Niagara Falls Nightmare is over.