When Barry bought his first single-family investment house a few years ago, he debated whether or not to sell the property or keep it as a rental. It was a decision, I told him, that he should have made before-the-fact since your chosen exit strategy can impact a number of factors, including your potential returns. I know things don’t always work out that way, especially when you’re a new investor and just learning the ropes. But, in Barry’s case, things didn’t work out well.
He kept the property as a rental but soon found that he was barely covering his holding costs with the rent. Then, when he decided he should probably let the house go, he discovered he was likely looking at selling his investment property at a loss. Wondering if there was a way he could recover, he came to me. I’ve been investing in real estate for decades and, once upon a time, I was in his shoes. So, I shared my experience with him and helped him find a way to move on.
How to Recover from Selling Investment Property at a Loss
Unfortunately, things sometimes happen that not only prevent you from seeing good returns on your investments, but keep you from realizing any at all. Paying too much for a property is one example, as is spending too much on the rehab. And, if you don’t have a real estate investment and analysis valuation method that helps you correctly calculate all of your costs, that’s exactly what can occur. Renovating the house to your personal liking, or to reflect what’s trending on TV, instead of according to the tastes and budget of the typical homebuyer for the area, is another common mistake. Even holding a property for too long can impact your ROI when you decide to sell if the market shifts toward favoring buyers or stalls due to a rise in interest rates. The bottom line is that any of these situations, and others like them, could interfere with your ability to sell your investment property at a profit, or at all.
Of course, when it becomes clear that you’re not going to get what you’re asking for and that to take anything less means you’ll have to sell your investment property at a loss, the financial setback can punch a hole in your wallet and your enthusiasm. And, depending on how much you stand to lose from the sale, recovering enough so that your investing business as a whole doesn’t go bust can seem improbable. But, even just having to miss out on the next few deals that come your way as you work to regain your footing—and find some funding—can hurt.
If you have to sell your investment property at a loss, however, all is not necessarily lost. There are strategies you can take advantage of that may help you recover—at least, in part. You’ll want to have a heart to heart with your financial advisor, of course, but it’s possible to deduct the loss from your taxes. One way to do this is to use the loss to offset the profits you receive from the sale of other investments, real estate or otherwise, and additional sources of income—up to a point. But, if your loss is larger than the maximum you can deduct from your profits, or capital gains, in a given year, you may be able to roll that loss over into subsequent years as needed. That’s assuming, of course, you don’t accrue other losses that will also have to be accounted for at tax time.
Another way to take a tax deduction on your real estate investment and offset the loss is to do a 1031 exchange. Doing a 1031, or like-kind, exchange is, in simplified terms, taking the proceeds from the sale of one investment property and using those to buy another. Keep in mind, though, that the rules for using this strategy are numerous and strict. You must find a new property in 45 days and close on it within 180, for example. But, if you’re able to do so, you may be able to defer your capital gains taxes on the newly purchased property. In this way, it’s possible that the money you save in taxes on one house will balance out the money you lost on the other.
It’s critical to remember, however, that tax laws are often complicated and frequently changing. So, never assume that they will work to your advantage under any circumstances, whether you’re buying your first investment property or your tenth. And, always seek the advice of your local tax professional to find out for sure.
In addition to considering the tax strategies available, it’s usually a good idea to cut your losses quickly and get out from under a deal that is dragging you down. The longer you hold out for an offer at your asking price, the worse your loss could become. Holding costs, such as your mortgage and real estate investor property insurance payments, will add up—and subtract that much more from your pocket. And, dropping the price of your property to encourage a sale—even one at a significant loss—is not admitting defeat. In fact, provided you can learn from the experience so that you don’t repeat it, selling at a loss could be a gain in knowledge.
Cut Your Losses and Move on Toward a Better Investment Strategy
On one of my early deals, I had to sell a property at a pretty hefty loss. And, like Barry, I hadn’t been buying and renovating property long enough to be able to comfortably absorb the loss—as if losing on a deal is ever easy. My problem was that I bought too high and spent too much on trendy renovations instead of what the market could bear. Then, when I finally got an offer, it was much lower than I wanted and so I passed. By the time I broke down and sold it, I was deep in the hole and desperate for a way out.
Two things of value emerged as a result of that experience. First, I vowed I would not make the same mistakes again. Second, in an effort to find a way to avoid making the same blunders, I became an independently owned and operated HomeVestors® franchisee. I continue to receive ongoing support from a dedicated and experienced Development Agent even after my week-long initial training ended. But, I have something else, too: access to HomeVestors®’ proprietary valuation tool, ValueChek™. This tool, which calculates the cost to rehab and adjusts for local material and labor rates, helps me to start correctly calculating my numbers and estimating the After Repair Value on a property before I ever make an offer. So, though I might occasionally need to recover from all the hard work I put into the job I love, for me, recovering from a bad deal is a thing of the past.
Cut your losses if your current investment strategy isn’t working and contact HomeVestors today to discuss one that does.
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