Before I delve too deeply into this subject, it's important to note that poor property investments rarely happen organically. In many cases, the factor that transforms an otherwise good investment into a bad one is entirely preventable. Sadly, for many of us, preventing our real estate investments from taking a sudden turn for the worse is something that we have had to learn from painful experience.
Like most unpleasant predicaments, the best way to get out of a bad property investment is to avoid getting into one in the first place.
In 1994, while in my mid-20s, I purchased two units in a north Edmonton townhouse complex. Edmonton was still a relatively small market at the time, but I'd heard rumblings from sources I trusted that a boom in the northern Alberta oil industry was on its way that would produce healthy rewards for real estate investors in the region. Owning two units in the heart of oil country was a 'can't miss'... or so I thought.
I purchased each unit for $29,900, if you can imagine. Units 708 and 712 had recently been renovated and were ready to rent. I found tenants for each unit and began awaiting a return that never came. In 1996, I renovated and sold unit 708 for a loss and sold unit 712 below purchase price. It's worth noting that I don't typically remember the unit numbers of past rental properties, but these units caused so much misery that try as I may, I will never forget them.
So, what turned this 'done deal' into a 'dumb deal'? What could I have done differently to have received the return I had anticipated?
The first thing anyone should do before purchasing a rental property is to do your due diligence on your market. This involves looking into fundamentals such as vacancy rates, in-migration, economic outlook, population projections, demographics, neighbourhood trends, etc. In most markets, you'll find some encouraging indicators, but it's imperative that you aren't blinded by any one of them. It takes a collision of fundamentals to make a great investment, not just one or two standalone bright spots.
In the case of my north Edmonton townhouses, I got so lost in my market's sunny economic outlook that I didn't even bother with the rest of the due diligence process. I failed to notice that my complex had a greater than 20 per cent vacancy rate partially caused by low in-migration.
In fact, I bought and sold these rental properties during an extremely rare three-year window where Edmonton's population actually contracted (623,400 in 1994 to 616,306 in 1996). I had a shortage of interested tenants and, as a result, was willing to rent out my units to even the seediest of characters.
Learn the rest of Darren's story by picking up a copy of our January issue, on newsstands now.
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Investor Darren Weeks has built up an enviable real estate portfolio. But he knows when to get out...and how. Here's his take on having a viable exit strategy.