What Should You Do When Your Property Is Worth Less Than What You Paid For It?

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What should you do if your property is worth less than what you paid for it? Hey, I’m Ryan McLean. I’m from cashflowinvestor.com.au and at the moment I’m working my way through the issues and concerns that you guys have and that you emailed to me.
A couple of days ago, I sent out an email to all of my email subscribers asking them to send me an email back, hit the reply button, and tell me what’s their biggest difficulty when it comes to investing in property. I got inundated with responses. I’m so stoked, so I thank you guys so much for writing in. I’m working my way through those questions and trying to get to as many of them as possible, as quickly as possible.
Today I want to talk about what you should do when your property is actually worth less than what you paid for it. I’ve had a couple of people, actually a few people, quite a few people, say this to me. They feel stuck because they bought a property, it’s negatively geared. Either they bought it off the plan or the property market hasn’t gone the way they wanted it to go. They can’t sell their property, because now it’s worth less than what they paid for it. Even if it’s worth the same, once they sell it and pay all the fees, like the real estate agent and everything like that, then they’re going to end up going backwards.
So, what should you do if your investment property is worth less than what you paid for it? I think the first step you need to take is you’ve got to work out both sides of the equations, right? We need to look at, firstly, what would happen if we sold it? Secondly, we’ve got to look at what’s going to happen if we keep it? I think a lot of the times we freak out and say, “Okay, well, I can’t sell it. I’m just going to have to keep it.” Then we just go into lockdown and we don’t think about what we can do about our situation.
Let’s step back. Let’s take a bird’s eye view and let’s analyze the situation from a higher standpoint. Firstly, let’s look at, okay, my house has gone down in value. What is the value? If I sold that property today and I paid my fees and everything, how much would I end up losing? That is the question we want to find out. If it’s $10,000, if it’s $20,000, if it’s $50,000, if it’s $100,000, how much money would I end up losing if I sold that property today? That’s the first figure that we want to know. Go and work out that figure.
The second thing we want to do is work out, okay, if I keep this property, how much is that going to cost me, and how much money am I going to lose that way? Let’s say if we sold the property today, we’re going to lose $30,000 after fees and everything else. But if we keep the property, currently it’s losing $100 a week because I’m renting it out, I’ve got tenants, but it’s not covering anything, so that’s about five grand a year that we’re losing on that, and it doesn’t look like it’s going up in value.
What we want to look at in this situation is how much money we’re losing every year in terms of cash that we’re pouring into this property. We want to work out, okay, let’s spread this, let’s take a timeline and look at how much is it going to cost me this year? How much is going to cost me next year? How much is it going to be costing me in five years’ time? Maybe we can do a five-year and then a ten-year lifespan of how we truthfully … let’s be truthful … expect this property to perform.
Let’s say I’m losing five grand a year on this property and nothing changes and it just stays the same for five years. Let’s say in five years’ time I’ve paid five grand a year in losses on that property, so that’s $25,000 that I’ve paid over the course of five years. Maybe that property’s gone up enough, just enough, so I could sell it and get my money back so I don’t lose anything.
On one hand, we’ve got if we sold today, we’re going to lose $30,000. On the other hand, if I sold in five years’ time, I’m going to lose five grand a year, or 25 grand, and then break even. Automatically, things start to look a little bit worse than what they could. Don’t stress too much. You really need to understand, should I keep it or should I leave it?
Another thing you need to look at, as well, is your mental capacity and what you can handle. For some people, holding onto a single property that’s losing money for five years is going to affect their borrowing power and their mental state, so they won’t go and reinvest again. Whereas, if they just cut that loose, left it as a loss, and then moved on and invested in something that was a winner, then they would end up ahead.
That’s harder to calculate, but that’s something you’ve got to look at as well. Is my mind so focused on this property that it’s actually limiting me from going and pursuing other opportunities? If it is limiting you, then maybe it is best to cut your losses, or maybe it’s best to keep it and just put it in a situation where you hardly have to think about it, ever.
The first step, how much would we lose if we sold it? Second step, how much would we lose if we kept it over the years? The third step is we’re not going to sell. What are we going to do about this? How can we improve this property and the performance of this property? You’re going to have to start getting creative. Things aren’t going to just work out for you automatically. You need to step in there and become a great property manager, a great investor, and find the gold, where the gold is.
Maybe, let’s say, we’ve bought a $500,000 house in the suburbs somewhere of [Melbourne 00:05:49]. It’s now worth less because the market’s not doing what we want it to do, and it’s costing us 100 bucks a week. We’ve rented it out, but it’s not covering it. What could we do to improve that?
Could we renovate the property to improve the rental yield of it? Maybe it’s only a two-bedroom house. If we paid whatever it is, $20,000, to add a room onto it, maybe we could charge $50 extra a week, or a $100 extra a week, and that would actually help lower our total loss on that property.
Maybe we can say the property’s not going to go up in value. Instead of it losing money each year, let’s invest $100,000 and build a granny flat on that property, and then rent that granny flat out. That property now goes from a negative geared property to a positively geared property.
You’ve just changed your situation where if you sold it now you lose $30,000. If you invest into it, build a granny flat, you’re now going to be making let’s say $50 a week, two-and-a-half grand a year. It makes sense now to keep it rather than sell it.
You’re going to start to get creative. See what you can do. See how you can improve it. Maybe if it’s a five bedroom house with two bathrooms, maybe you can work on creating a dual-occupancy so the downstairs is for one family and the top part of the house is for another family.
There’s so many different things that you could do with property to increase its value and to increase its rental yield. Start to get creative. Start to look into ways that you can improve the value of your property, not just in terms of equity value, but in terms of cash flow value as well.
I hope this has helped. This has been the answer to the question what should I do when my investment property is now worth less than what I paid for it? It’s not a perfect answer, it never is in investing, but I hope it gives you some ideas to move forward with. If you want daily tips on how to find and invest in positive geared property, then head to cashflowinvestor.com.au and enter your name and email address there.