What To Do If You’ve Bought A Bad Property

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All hope isn’t lost if you bought a dud property, here are some ideas of what to do if you’ve bought a bad property investment.

I get emails all the time from people who have invested in really bad properties. Unfortunately, they’ve gone out there, they purchased a property that is now less than worth less than what they paid for it.

They can’t rent it or they’re only renting it for significantly less than what they thought. And so, today, I wanted to get Ben Everingham, buyer’s agent from Pumped on Property, on to talk about what can we do if we find ourselves in this situation where we bought a property that we probably can’t sell because it’s worth less than we have and we can’t rent it out.

Ryan: Hey Ben, thanks for coming on today.

Ben: Good day Ryan, thanks for having me.

Ryan: So this is a bit of a [inaudible 00:34], but something that’s really important because it does happen to a lot of investors. We see investors either getting stung by some sort of property spruiker who’s talking about this brand new property and this growing area that they should invest in with guaranteed rental returns.

Guys, if you ever see “guaranteed rent”, run for the hills, okay? It’s a marketing tactic to sell you overpriced property. But, a lot of people to get stung. Mainly through property marketers, is what I see, but there are occasions where people invest and something goes wrong.

Often, these people feel like, “Okay, I can’t do anything until my property goes up in value. I’m stuck for the next 10 years with this dud.” And so, we wanted to share with you guys some things you can do even if you’ve had a bad experience and bought something bad. How can you actually move forward out of that?

I’m actually really excited to talk about this today.

Ben: Yeah. So am I, so am I. I’ve been in this position myself.

Ryan: Have you? Let’s talk about that first.

Ben: Yeah. So, really, really briefly, bought a brand new property, thought it was a cracking deal, lost $37,000 in 12 months on it. So, it wasn’t such a great deal. Had I have listened to this episode first, I probably never would have bought the bloody thing in the first place, to be honest with you.

Ryan: Yeah. If you want to hear the full story, we actually talked about it in the last episode where, you know, on paper, you thought, “Worse case scenario, I’m going to make $50,000.” Turned out that he lost $30,000 or more. Yeah, it happens to the best of us. But, there are things you can do to move forward.

First, let’s talk about this. First, I want to say, there’s properties people buy where they go down in value, but there’s actually opportunity left in that property. So, you could potentially do a renovation or maybe you can do a subdivision of the land or you could add some extra rooms to the property or build a granny flat and get yourself out of a hole.

Some people do have those opportunities in order to improve their property. And if you have that opportunity, obviously, we absolutely recommend that you go out there and you make something of your dud property. But, what we want to talk about today is people who don’t really have that opportunity.

An example might be someone who’s bought a unit, maybe like a new build unit in Brisbane 3 years ago, or they bought in some mining town or something like that and their unit is pretty new because it’s just been built. It’s the same as a hundred other units in the block. There’s nothing they can really do to improve that property or to get out of the hole.

First, let’s talk about what can they do with that property to, I guess, minimize the negative effects on their life?

Ben: I suppose there’s 2 things there. There’s, one, a negative equity effect where you’ve bought it for a price, it’s now not worth that price so you’ve lost money on paper. And the second thing is, you’ve bought into an area where there was an undersupply of property, all these new properties came on and now you can’t rent the property out or you’re not getting anywhere near the cash flow, now that your 2-year guarantee is over, you thought you would get.

I talked to people in Mackay in Western Australia where the guarantee was $700 a week and now they can’t rent the same property for $300 a week because the vacancy rate in the area is above 10% and, you know, there’s no easy way out of that before you start bringing accountants in and appreciation specialists to help from a tax perspective.

Ryan: Yup. We obviously want to put disclaimers out there that we’re neither mortgage or tax accounts, so please seek professional advice if you are in this situation. But, some of the things that you can do to improve your situation potentially is, firstly, be careful about re-valuing your property.

Because if it is worth less than what you paid for it, there could be repercussions from the bank in terms of them wanting you to supply more cash in order to continue to hold that property because you have now borrowed more than what the property is worth.

Obviously, speak to a mortgage broker about that, but be really careful when re-valuing your property. Don’t just jump in and do it with the bank because it’s been 2 years and it’s time to do it. Yeah, just be really careful about that.

And then, you were also talking, before we started recording, about speaking to an accountant and potentially getting some tax back throughout the year rather than at the very end?

Ben: Yeah. I’d say the first thing to do with a brand new property, for everyone that hasn’t already done it, would be to get that depreciation schedule set up.

There’s a couple of big national companies like BMT and Washington Brown, which I’ve personally used before and they seem to do the trick. And then, once you’ve got that depreciation report together, you go to your accountant and there’s an amazing thing which I only found about 4 or 5 years ago, called a “Variation to Assessment”. Again, we’re not going to go into all of the details.

But, what it basically means is that instead of your balloon payment back at the end of the financial year on your property, which is all of your depreciation, holding cost associated with the property, etc. You basically get it back on a week-to-week basis.

Let’s say you’re earning $1,000 a week and you’re paying $200 tax. Instead of getting $5,000 chunk of money at the end of the year, you just get an extra $1,000 in your pay packet per week because you’re ultimately receiving that money on a week-to-week basis as opposed to the end of the year.

Ryan: I think we should clarify that because it sounded like – I think what we said was a bit misleading in terms of they’re getting an extra $1,000 a week. Let’s keep the specifics out of it because, obviously, we’re not accountants. But basically, I think what Ben is trying to say is, usually what we’ll do is we’ll hold the property for a year. At the end of the year, we do our tax return.

And if we’ve made losses on that property and offset it against our income, then there’s a chance that we can get a tax payment back or a tax return that could be in the thousands of dollars. So there’s an opportunity to go and speak to your accountant and potentially get that spread out over the course of the year, that tax is saving.

I’m not exactly sure how it works or whether you get paid by the government or whether it just doesn’t get taken out of your pay. I’m not sure how it works. But, you can speak to an accountant about that, but it can ease your cash flow situation throughout the year. Rather than get one lump sum at the end of the year, you can spread it out.

Ben: Yup. Do you want to edit that bit and just take my part out and put yours in? Because I think that’s a much better way to explain that.

Ryan: I think we’re alright. I think we’re good.

Ben: Alright, cool.

Ryan: Often, you’ll be in this bad position. There’s not a lot you can do and we wish we could help you more, but sometimes, there’s not much more you can do than speak to your mortgage broker and make the right decisions there, speak to your accountant and make the right decisions there and take advantage of the tax savings that you can if they’re available to you.

Moving away from that and things we can do on the property because these people bought bad properties can’t do a lot. What can we do moving forward to maybe continue investing or to offset that loss?

Ben: I think, I suppose, the first thing you’ve got to do before you decide to move forward on another purchase is to really get clear with yourself, “Am I going to hold this property on this loss?” Because it’s not just the $20,000, $30,000, $50,000, $100,000 that you’ve lost on paper to sell the property. It’s also the opportunity cost over that period of time that you hold that property moving forward.

This is something that I recently heard from The Property Couch guys and I love it. It’s the long term opportunity cost of having a $500,000 of money tied up in this opportunity that’s giving you 0% returns versus $500,000 tied up in another opportunity over the next 10 years giving you, let’s call it, 4% capital growth in a 5% rent return. That compounding effect over time is massive.

Ryan: That’s really only for people who are stuck in terms of borrowing capacity and this property is holding them back. I can imagine a lot of people, let’s say they put the 20% down on a $500,000 property, so they put $100,000 down, but that property is now worth $300,000 so they’re effectively like $100,000 in the hole. Them getting rid of that property they now owe $100,000. There’s no opportunity cost discussion there because they don’t have $100,000 to pay for it.

Ben: Yeah. For those people that can’t offload it that are in that situation, you’ve got to hold your way through it if that’s what you decide to do. But, there’s plenty of people that I talked to from your community each week that have these properties and with the changes to APRA and the servicing tightening at the moment, these properties are the things that are actually holding people moving forward. Yeah, you’re completely right, if it’s not holding you moving forward.

Ryan: So, I think, really, we should be saying to people that they should probably go and speak to a mortgage broker and to find out, do they still have borrowing capacity and can they go again into another property or are they really stuck because this property is holding them back.

That’s obviously going to vary from person to person. So for some people, obviously, if you go to your mortgage broker, they’re like, “Look, you can’t borrow anything else because this property is holding you back.” Then you might just have to wait it out or come up with the money so you can sell it and cover that loss. But, for a lot of people, you’re going to go to your mortgage broker and they’ll say, “Yes, you’ve got this property, but you’ve still got extra borrowing capacity and you can go again if you want.”

Ben: Absolutely. If you’re in the situation where you can go again, then, obviously, it’s extremely important to get the right outcome for that next property. We’re having a laugh about it.

Ryan: We don’t want to make the same mistakes that we did last time.

Ben: You know, basically, that next property needs to perform twice as well to make up for the loss on the property that you’ve currently got. That’s easier said than done, obviously.

Ryan: What we want to get people to understand is often, people will buy a bad property and they’ll be like, “I bought this dog of a property. It’s holding me back.” and then they just sit on it and they don’t do anything. But, there’s an opportunity for a lot of these people to go out, kind of like pretending that doesn’t exist and go out and trying to make more money through other investments that can then offset those losses.

I think first thing is you want to avoid the same mistakes that you’ve made. Whether it was buying from a property marketer or something like that. You definitely want to go ahead and educate yourself on your next purchase because you’re going to want to buy a property that’s probably low risk in a solid suburb with an opportunity to get growth.

Something me and Ben were talking about before we started recording was that you’ve made a bad decision. Like, you’re paying for that bad decision. A lot of people, when they’re investing in their first property, they’re just hoping the market is going to go up in value. I

f does, great. If it doesn’t, you know, oh well, that’s a bummer. But for you, if you’ve already made that bad decision, chances are you’re going to have to work your way out of that hole. So that doesn’t mean buying speculative property that you’re hoping the market is going to go up in the next year and you’re going to cash out.

It probably means getting down, doing your research, finding a property that you can buy under market value or finding a property where you can increase the value of it through one method. Like, cosmetic renovation or subdivision or granny flats or whatever it may be.

I think for a lot of people in this situation, you’re going to have to be a very active investor and you’re going to have to work your way towards getting equity growth rather than just hoping for the best.

Ben: Absolutely. And on top of those equity gains you’re talking about, trying to find something with above average rental return, so neutrally or positively geared. Buying in the right timing of the market cycle, so hopefully in that rising or start of recovery phase so that the next 3 years, you know, a rising market lifts all boats and it pulls the property that you buy forward. And absolutely buying below market value. Even though the market is warming up at the moment, there’s opportunities every single day to make $20,000, $30,000, $40,000 upfront.

Ryan: Yeah, buying below market value, do you mean?

Ben: Absolutely. Like, discounts are everywhere. There’s still plenty of people that have a financial need to sell property right now. There’s still divorces, there’s still business bust ups. So there’s still all this stuff that goes in the good and the bad marketplace. So, making sure that you do your research correctly, know what market value is and then not settle for anything else that’s not below market value.

Ryan: I think this is going to take work. it’s going to take a lot of research. It’s going to take looking at a lot of properties to find these few properties that are those good properties. But, I think you really kind of need to be willing to do that if you want to get yourself out of this hole.

Ben: I always think about that. Like, you know, let’s say you could make $40,000 on the day you buy a property and you earn $80,000 per year through your job. How much time do you trade in the 6 months of your job to earn that $40,000? And then people expect to be able to jump online, spend 4 or 5 hours researching and then make $40,000.

I’m like, if you can do that and you can make $40K in 5 hours, why the hell are you going to work everyday and why aren’t you using those skills to just professionally do that?

You know, you’ve got to remember that it does take time. It does require work and it does require looking at the right things as opposed to what 90% of people look at and that is judge property on realestate.com that’s on market that looks good based on other properties that they can see listed online.

Ryan: Yeah. I think you hit the nail on the head there. People do, they often expect too much and they really treat property investing either like gambling or like a sure thing. Like that property that you built yourself, new build, you’re like, “Yup, this is a sure thing. Easy money. I’m going to make $100,000.” and then you bought it and you ended up losing $30,000.

I think we need to be more realistic with how hard this can be and how much work we need to do to make it happen. Because if it was as easy as they say, everyone would just quit their jobs and be full time property investors.

Ben: Im not joking. I remember when I bought that property with my mate Micah. Before we even bought the property and sign the land contract, I was talking to him about, “Let’s go to Bairn for a weekend away when we sell it. We’ll have just made $100,000 and we’ll just be spraying money everywhere. This is going to be sick!” We’re like, fully bought in to this trip and identify where we’re going to stay.

Ryan: You’ve already spent the money before you’ve even made it.

Ben: And then I’m sitting there with him at the end of it and I’m like – because there was a bit of tension there, obviously, I’d just lost a good mate some money. This is 3 years ago and he’s like, “So do you still want to go to Bairn?” and I’m like, “Yup. Let’s go to Bairn, man.”

Ryan: Oh, did you still go anyway?

Ben: We still went to Bairn, man, because you know, it was just a learning experience at the end of the day.

Ryan: And then you probably slept on the beach because you couldn’t afford to stay anywhere.

Ben: Yeah. We slept in the backpackers for $15 a night.

Ryan: You weren’t spraying the cash around or anything like that?

Ben: I wasn’t spraying any cash and I had to pay for him all weekend so it cost me like another $500.

Ryan: Oh, well, lessons learned, hey?

I hope we got across when you’ve made this bad decision and you have an opportunity to go again, you really want to do it right. Do your research right. Try and get some “instant equity” or like equity gain in a short period of time either through buying under market value or creating that value yourself.

Look at something that’s positive cash flow in order to offset the losses that you’ve got. Because if you’re in a bad cash flow position from this old property and you buy something that’s negatively geared, then that can put you in a really rough spot in order to afford those properties moving forward. Yes, you can get good growth and positive cash flow if you know where to look. But, yeah, just be careful of your cash flow position.

Don’t put yourself in a hole trying to get the speculative growth if it means you’re not going to be able to afford your properties long term.

Ben: Every single day of the week these days I’m having a laugh about about – you know, when I talk to people, they go, “I’m looking for cash flow or I’m looking for capital gains.” and that’s the mindset in the marketplace.

You and I talk about this all the time. Absolutely, you can get both right now in quality metro markets in Australia. The old days of cash flow or capital growth are completely over. It should be those 2 things and it should also be manufacturing some value at the same time if you’re smart about it.

Ryan: Yeah. It should be everything.

Ben: Everything!

Ryan: All of it. That’s the thing. I think most people will say you can only get positive cash flow in a negative geared property. They are people selling properties that are negatively geared.

Ben: Yeah. When the cash flow looks positive after their 15 accountants have stepped over the top of it with their artificially inflated rental return and depreciation schedule, just walk away, again – or run, as Ryan says.

Ryan: I’m not sure if we said it in this one or the previous one. But, yeah, if you see “guaranteed rental return”, run for the hills. It’s a marketing strategy to sell you very pricey properties.

The last thing we wanted to talk about was buying in a rising market as well. We’ve talked about not hoping for the market to go up and no investing just hoping that the market’s going to go up and make you all your money back. I’m talking about actually getting your hands dirty, manufacturing that growth yourself, getting that the cash flow yourself. But still, we also want to buy in a rising market. So, let’s talk quickly about that.

Ben: Yeah. I think the easiest way to describe the rising market is that anybody that bought in Melbourne or Sydney from 2011 to 2015 is doing what I wanted to do after I sold that property and just spraying cash around right now because everyone has made money. They did nothing special except buy at the right time in the right metro marketplace. By rising market, we just mean – property is cycular.

Sometimes it’s flat, sometimes it goes backwards and for a short period of every cycle, it goes up dramatically over a period of time. If you look back over the last 20, 30 years of Australian property price growth, it generally spikes for 2-3 years in a metro market and then sits flat for whatever period of time after that.

So jumping on at the rising market stage doesn’t guarantee anything, but it gives you the best possible opportunity to be able to create short term capital growth which you can do whatever you want with. If you’re a low-risk personality type like me, you might just be happy with that gain and not touch it. Other people might use equity from that gain. Other people might take out some of that equity for a savings buffer for the future. Whatever you do, always buy in a rising stage of a rising marketplace.

Not everybody is always going to get that right. There’s an awesome report that I follow monthly, I think you do now as well, called the “HTW Month In Review” report. It’s not a silver bullet, but it does show you each of the capital cities and major regional markets in Australia are at.

You can look at the trends over time. Again, it’s not perfect because for the last 12 months, Sydney’s been top of market. All of a sudden, this month, it’s back to rising market because they’ve finally realized that they got it completely wrong. You know, take that one indicator with the 20 other indicators that are important and do that research correctly.

Ryan: Yeah. That’s the thing. The Herron Todd and White report is so good just to see a broad overview spectrum of where things are at and then you can go and do more research into the markets that they’ve identified as rising to pick your suburbs in those markets and things like that.

Really, we’re hoping that if you do this, you’ll have multiple chances to make up for the losses that you did on your bad property so you could have a rising market or you could manufacture that growth yourself or you could get some gains through the positive cash flow that you create.

Something to leave you guys with would be; learn from your mistakes, get real yourself and just say, “Okay, what did I do wrong? Did I just take someone’s advice?” Maybe you just listened to a property marketer, you only read their reports that said this suburb is going to go up. You didn’t do a price analysis of what you’re buying versus what’s currently selling on the market. Maybe you made some mistakes there. I guess, get real with yourself. Try and work out, “What mistakes did I make?”

I think for this next property, you either want to learn to do it yourself – that could be through courses, it could be through books. I’ve got courses on how to research a suburb inside my membership at onproperty.com.au, so you may want to check that out. You might want to learn how to do it yourself or you may want to get – you may want to pay someone to be your coach or to be your buyer’s agent.

Someone like Ben who isn’t just going to say, “Here’s the property that you should buy.” And push it on to you and this is good, go ahead and it, here’s some professional report. But to actually say, “Here’s how I got to that conclusion.” And to actually walk you through it and show you how you could do it yourself and you can double check it.

It’s so awesome because I had a customer of mine – it’s actually happened twice to me, I think. I’ve had customers who have come to me and they are a member of my site, but they’ve also gone to you and hired you as a buyer’s agent and at my course on suburb research, which is slightly different to the way you do research, but it’s pretty similar. And they’re like, “Yeah, I just wanted to check the suburb that Ben recommended me using your strategies.” and they’ve gone through it and they’re like, “Yeah, everything checked out.”

It’s good to see that we’re doing things slightly differently, but it’s both identifying that the suburb looks solid. It’s been really exciting to see for people. And then they can go out either through your coaching or through my courses and things like that.

They can then go out and identify multiple suburbs from multiple different properties. I want to get people away from just blatantly trusting people with their money and with their property purchase and to get down to understand, “Okay, why am I buying this property? Why am is this area good? Is this property actually below market value?”

Ben: 100% agree with you. I think we’re both on the same page. Whether it’s through your courses or the way that we work with people, we’ve decided to reduce the number of people that we work with each month so that we can actually offer a handholding or coaching exercise to what we do. That’s new for us because people kept asking for it.

You know, to take the time to really give people the skills so that – the same thing as you – you want to set them up so that they can do the next transaction themselves with confidence. With that 5% of things that you and I have both learnt the hard way that add massive value long term to your strategy, to your portfolio and to the properties you buy.

Ryan: If we could leave you with one thing today, it would be to educate yourself and to understand why you’re purchasing the property your purchasing. And also to be an active investor. Don’t just expect the next property to go up, but actually to do stuff to make that property better and to make it make more money.

If you guys want to check out my courses, that’s over at onproperty.com.au. Or, if you’re interested in working with Ben and letting him find you a good suburb and coaching you through that process as well; which, I think, for some of these people in this situation, they’re going to need someone to really coach them through the fears they have, the mistakes they made. Ben could identify what mistakes you did make and how you can overcome that in the future.

Anyway, Ben is offering free strategy sessions to members of On Property. So if that’s something you’re interested in, head over to onproperty.com.au/session and you can learn about that over there and you can book a session with Ben.

Thank you guys so much for listening. I was really excited to do this episode. I hope that this helps a lot of people who have found themselves in this bad situation. I hope that you have hope moving forward and that you can take action to move towards financial freedom or whatever your goals may be.

That’s it from us. Thanks so much for coming on today, Ben.

Ben: Thanks a lot for having me, Ryan.

Ryan: And until next time, guys, stay positive.

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