Every investor with several properties typically must make many tough decisions in a timely manner. You must know when to hold and for how long, and when to fold and how quick. This is where proper planning and great strategies come in. The history of every property someone buys is not readily predictable. You may buy a property thinking it is an excellent investment, then one mishap like a tenant from hell scenario happens and your nightmare starts. Such a tenant could devise any combination of scenarios to keep staying in your property without paying rent for a while. I have seen them at the rent courts come up with accusations against landlords that make judges keep postponing the cases to sort out alleged on-going violations – sometimes rightly, sometimes wrongly. Your planning must include such unexpected scenarios. As an investor, you must plan how much loss you can absorb in your business when dealing with a particular property or a bunch of them.
When planning, you should have fallback scenarios because life happens. For example, when squeezed for working capital, you could sell some of your rentals to fill your coffers. Such selling is a balancing act. That could mean buying in some cheaper localities to shore up your cash flow through bringing in rental income as opposed to just buying for appreciation. The decision of when to hold or fold depends on how capitalized you are. That could enable you absorb some short-term blows and still stay standing. If a property is well-built and in an appreciating neighborhood, then a short-term loss may be okay if you have a long-term perspective on the property.
On the other hand, if you are not well capitalized or if the property is a cash guzzler without any options of recouping the losses in the future, then your planning must include cutting short such losses quickly, so they do not decimate your business. When to hold is an individual decision. The business can have great times and some extremely painful situations. You need to know how to evaluate the tough times against the great times. In many cases, if you hold a long-term view to your investment, you can withstand the minor gyrations so long as your losses do not move from month-to-month, and then year-to-year. Sometimes it is better to let go of a property quickly to free up your cash and get into bigger and better opportunities instead of getting stuck with non-performing ones.
(Notes: Excerpted from “How Not to Fail in Real Estate” page 180.)
