Knowing When to Cut Bait in Real Estate Investing

By A. I. Lendberg, Edited by Douglas Katz – 03/21/23

Real estate investing is a challenging and complex industry, and many inexperienced or unprepared investors may struggle to achieve success.  According to a study by Forbes in 2019, it was found that nearly 80% of real estate investors fail within the first five years. This failure rate can be attributed to various factors such as lack of experience, insufficient planning and research, poor decision-making, market volatility, and economic downturns. However, it is also important to note that many successful real estate investors have faced failure or setbacks at some point in their careers, and have used those experiences to learn and grow as investors.

Hold or Cut Bait

One huge factor that is sometimes under-emphasized is knowing when to cut bait.  As a real estate investor, it’s essential to know when to hold ’em and when to fold ’em as it were.  Walking away allows you to stem the losses on a project.   While it can be tempting to stick with a project that you’ve invested time and money into, sometimes it’s better to walk away and cut your losses.  It may sting your ego but that is better than killing your aspirations for wealth and financial independence completely.  It definitely helps to have some triggers to allow for you to make the decision from a business perspective.

The first thing to consider is why the project is not working out. If the project is failing due to external factors such as changes in the market or zoning regulations, it may be worth holding on to see if the situation improves. However, if resolving the issue is itself too expensive or would take too long to  project is failing due to internal factors such as poor planning or management, it may be time to cut your losses and move on.

Another factor to consider is the financial impact of continuing with the project. If the project is draining resources and not generating a positive return on investment, it may be better to cut your losses and invest in a more profitable opportunity.  Going down with the ship just means that your real estate future dies with the project.  It is definitely better to live to fight another day and chalk the losses up to educational expenses.

Analysis is Key

Ultimately, the decision to cut bait on a project requires a careful analysis of the situation and a willingness to make tough decisions. It’s important to remain objective and avoid letting emotions or sunk costs cloud your judgment.

  1. Lack of progress: If a project was supposed to be completed within a certain timeframe, but is not even close to completion after months of work, it may be a sign that it’s not going to pan out. For example, if a developer is building a condo complex and only the foundation has been laid after a year of work, it may be a sign that the project is not making progress.
  2. Excessive delays: Delays in a project can be costly, and if they are happening frequently, it may be an indication that the project is not viable. For example, if a renovation project was supposed to take six months, but after a year it is still ongoing due to various setbacks, it may be time to cut bait.
  3. Lack of interest from buyers or tenants: If there is no interest in the property from potential buyers or tenants, it may be a sign that the project is not meeting the needs of the market. For example, if a developer builds a luxury apartment complex in an area that is known for affordable housing, but there is no interest in the high-end units, it may be time to reconsider the project.
  4. Cost overruns: If the project is consistently going over budget, it may be an indication that the project is not financially viable. For example, if a developer sets a budget of $10 million for a project, but the actual costs end up being closer to $15 million, it may be time to reassess the project.
  5. Legal or regulatory issues: If the project is facing legal or regulatory issues that cannot be resolved, it may be time to cut bait and move on. For example, if a developer is unable to secure the necessary permits to build a project due to zoning regulations, it may be time to reconsider the project.

By paying attention to these signs and acting accordingly, real estate investors can minimize their losses and maximize their returns. It’s important to remember that cutting bait on a project is never an easy decision, but sometimes it’s the right one for the long-term success of your real estate portfolio.  There is hope, though.  Planning for the worst and planning accordingly can help keep you out of trouble before it starts.

Preventing the Dilemma

Although not perfect, you can do a lot to stay out of situations that become so dire that you are faced with the decision to abandon plans to complete a property.  I see a lot of investors who try to minimize things like reserves meant to keep them out of trouble.  Sometimes they are not honest with budgeting or overly optimistic about the market.  Here are some strategies that can help you avoid real estate investment Armageddon:

  1. Do your due diligence: Before investing in a real estate project, conduct thorough due diligence to ensure that the project is viable. This includes researching the local market, assessing the competition, and analyzing the financial projections.
  2. Plan for contingencies: Real estate projects can be unpredictable, so it’s important to plan for contingencies. This includes building in buffers for cost overruns and delays, and having a backup plan in case the project does not go as expected.
  3. Hire experienced professionals: When investing in real estate, it’s important to work with experienced professionals who can help guide you through the process. This includes hiring a reputable contractor, architect, and attorney, among others.
  4. Stay up to date on regulatory and legal issues: Real estate projects can be impacted by regulatory and legal issues, so it’s important to stay up to date on any changes that may affect your project. This includes monitoring zoning regulations, environmental regulations, and other relevant laws.
  5. Focus on the fundamentals: When investing in real estate, it’s important to focus on the fundamentals. This includes investing in properties that are in desirable locations, have strong cash flow potential, and are in good condition.

In conclusion, real estate investing can be a lucrative venture, but it’s not without risks. When facing a situation where a real estate investment is no longer profitable, it may be time to cut bait and move on. While it may be difficult to let go of an investment, holding onto a losing property can have significant financial consequences. By recognizing the signs of a failing investment and taking decisive action, investors can avoid further losses and protect their overall portfolio. Remember, sometimes cutting bait is the best option for a successful real estate investment career.

Disclaimer: This article was created with the assistance of multiple ChatGPT AI language models and has been edited and refined by Douglas Katz. The information provided in this article is intended for general informational purposes only and should not be considered as professional or expert advice. The views expressed in this article are solely those of the author and do not necessarily represent the views of ChatGPT or OpenAI. Readers are advised to do their own research and consult with relevant experts before making any decisions based on the information provided in this article