Smart investors have an exit plan for bad real estate investment
Is your real estate investment sinking?
There is no need to drown with it – hedge your risk and get out of that bad real estate investment.
“Hedging provides a means for traders and investors to mitigate market risk and volatility. It minimizes the risk of loss. Market risk and volatility are an integral part of the market, and the main motive of investors is to make profits”
A reality with investing in projects like real estate development that still have a creation timeline during which the investment incubates is that there are risks and ‘Anything can happen”. Even when fully built, the opportunity to not earn from it anymore still exists (the recent burning of the Abuja-based Ebeano supermarket is a valid proof of this).
To successfully hedge the risk of losing all your investment in it, lies in knowing how to prevent, measure, exit, and/or leverage existing equity of such investments.
In 2020 when the COVID pandemic hit, and threw the financial sector into enough chaos where previously viable options started to feel the pinch, lost their spark and value – the real estate market also suffered from this. This happenstance left investors whose monies were caught midway and unable to cash out with either a growing amount of cash value loss to absorb or the requirement to diversify into other classes that would make up for those losses.
Seeing as real estate is baseline fueled by investors’ money/funds, therein came a heightened misconception that prices will crash because people will try to pull out their investments and/or need to liquidate for cash.
To be fair, it was a rational thought to have because technically more people should have fewer funds to ‘invest’ and be tied down in such products, and those who might be needing to liquidate assets would be looking for how to sell them off. In such troubling times of needing to liquidate, lowering the price is a very common way to make the asset for sale more appealing for the next investor who is giving the bailout.
However, that wasn’t predominantly the case and though there were certain quick or distress sales in the market; with the tightening of cash flow and the onset of market inflations came to the increase of value appended to properties. And since then, it has been a continuously upward appreciation for residential property values especially.
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The fact is, that a few cash-needing property owners wouldn’t in any way mean that or impact the market as hard as to cause a crash. Bearing in mind the Nigerian housing deficit and the recently growing returns to investors and stakeholders, it became an adaptable business sector to deal in.
Instead of crumbling, the new rules of engagement were reinforced; and the reason is very simple – DEMAND; there are still a lot of people needing homes.
Now, let’s further widen the scope of what we refer to as real estate – this would include commercial real estate investments.
And a good number of them lost cash value on their investments. Imagine all of the commercial property owners and investors whose assets are not yielding the same or the increased income as were being estimated for returns. Or those whose commercial developments have hit a snag and are stalled in their completion timelines – that’s the money going down the drain.
Do you know that in 2015, just before the 2016 recession there were shopping malls’ investment projects that didn’t get completed and are no more in the works?
Some of them are/were to be the Maitama mall, Asokoro City Mall, Twin Lakes Mall, and the Palms Shopping mall extension.
For whatever reason that could come up, there will be a few real estate investments that will not work.
But here is the thing, and in some cases, all hope is not lost and there are ways that they can be dissolved still with minimal losses to the initial investors.
Applicable to other spheres of investment too, here are some of the ways that you can generally prevent yourself from totally losing your investment in real estate.
1. COMMIT BUT SPREAD YOUR PAYMENTS: Make payment as a commitment but spread the payments over a duration – also known as a payment plan and this can be benchmarked across milestones that ensure that the rate of work continues as anticipated. More often than not, doing this also means that there is a performance bond between parties to hold accountable the developer.
2. GET INSURANCE: As an employee taking on a mortgage for example and you lose your job/source of income, to prevent yourself from losing your equity and raking in massive debt, you can apply for Employee Insurance that will make contributions for a duration in which you can replace your source of income.
3. KNOW WHEN TO CUT YOUR LOSSES: This applies more to the developer and/or project management team; know when to cut your losses, stop work, exit the bad real estate investment, and repurpose the resources and liquidate in the most viable means tenable.
**if going this route, do note that whilst time might need to be a high priority factor, don’t let it rule supreme to liquidate at any cost – as long as you understand the product, you will find to leverage the highest value it offers.
PS: Solutions are never cast in stone and will always require a certain element of customization, so before implementing these methods be sure to have consulted the appropriate subject matter experts to properly assess the situation and how to apply these points where applicable.
You may also download her free ebook on real estate here