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
The original version of this article appeared on propertyinvesting.com on Mar 9 2012. We thank Steve McKnight for his great article.
