The bigger your portfolio, the easier it is to miss underperforming assets. No matter how robust your real estate investments are, one bad apple can spoil the rest.
In this article, I want to show you how to identify an underperforming asset and, more importantly, how to create enough value to turn it around.
What Are Underperforming Assets?
Underperforming assets are properties or investments that fail to meet expected performance benchmarks. The reason for poor performance might be market shifts, poor management, or careless spending. These issues can affect the overall growth and gains of your portfolio.
Whatever the case might be, Identifying these assets and the culprit early is the best way to avoid losing money or making the situation worse.
How to Identify Underperforming Assets
The first step is to make sure you’re tracking the right performance benchmarks. This is a business, after all.
A good place to start in setting these benchmarks is to ask yourself the following questions:
- What are your monthly revenue targets for each asset?
- What are your operating costs?
- What is your NOI?
Look at each asset individually and compare its performance to market standards. Then, here are some things you’ll want to start evaluating:
- Financial Returns: Analyze cash flow, rental income, and operating expenses. A property with returns lower than market averages signals underperformance.
- Occupancy Rates: Properties with long-term vacancies or frequent tenant changes may need attention.
- Condition of the Property: Physical neglect can lead to declining value and tenant dissatisfaction.
- Market Trends: Changes in the local market can make certain properties less competitive.
8 Tips for Creating Value in Underperforming Assets
Once you’ve identified the asset, you must identify why it’s failing. It could be you’re overleveraged, or it could be that your occupancy is low. There’s no sense in trying to fix something until you know what needs to be improved.
Getting to the root cause will help you identify the best course of action. While all property challenges are different, here are some common ways to add value to your assets.
Remember: A strategy should be designed to improve performance and sustain future growth.
#1: Improve Operational Efficiency
Review how the property is managed by scrutinizing your property’s financial and operational performance. High expenses and inefficient processes can starve revenue.
So, ask yourself: Are you overstaffing? Are you overpaying?
By looking at areas like maintenance, staffing, and vendor contracts, you can find inefficiencies that drive up costs. Improving operations, renegotiating vendor service agreements, or implementing rental automation can help cut unnecessary expenses.
While a hefty upfront cost, investing in a property management company can actually reduce the overall cost of ownership since they’ll leverage an existing network of resources. (Check out this guide for more info on the pros and cons of property management consulting services).
#2: Reinvest in the Property
If you take cash flow and reinvest into your property, you can make meaningful improvements to create more value for your tenants (and enhance your overall rental property valuation).
Replacing outdated appliances and making minor updates, for example, can go a long way in driving up rental income.
To fund these upgrades, you can use income from the property or refinance to pull out equity. The goal is to ensure upgrades boost returns, either through higher rent, lower costs, or increased property value.
#3: Reposition the Asset
It might not work for every property, but If the property no longer fits its market or sector, repositioning it can unlock new opportunities.
For instance, converting an underused office building into residential apartments or adding retail spaces on the ground floor can align it with shifting demand.
This approach often involves assessing local market trends, securing necessary permits, and planning renovations carefully. While it requires an upfront investment, a well-executed repositioning can significantly increase occupancy rates, rental income, and the property’s overall value.
#4: Adjust Rent or Lease Terms
Adjusting rent or lease terms can increase income and occupancy (Check out this guide for more insider tips on boosting occupancy rates in multifamily properties, specifically).
First, compare your rates to similar properties in the local market. If your rents are too high, lowering them slightly attracts more tenants and improves occupancy. If they’re below market value, raise them gradually to boost revenue without causing tenant turnover.
Offering flexible lease terms, such as shorter leases or move-in incentives, can also help attract and retain tenants while balancing your financial goals. I’d also recommend improving tenant screening to improve the quality of your renters, which could reduce turnover.
#5: Enhance Marketing Efforts
Good marketing fills vacancies. There are a lot of different marketing techniques you can leverage to drive interest. Start by updating your online listings with clear, detailed descriptions and high-quality, professional photos that showcase the property’s best features.
If possible, use virtual tours to attract remote prospects and make the property stand out. Invest in targeted online advertising, focusing on platforms like social media or local real estate websites, to reach your ideal audience.
When all else fails, think of creative offerings, move-in specials, or referral bonuses to attract more leads.
#6: Offering Additional Amenities or Services
If you’re searching for creative ways to increase monthly revenue, you can offer additional amenities like preferred parking, EV charging stations, or valet trash. This is a great way to collect additional cash without raising rent or adding units. Plus, your tenants can choose to opt into different services without driving up rent costs for other tenants
JLL president of retail property management Kristin Mueller recently said that “Ancillary income programs [have] become a year-round focus, and [have] become an important part of merchandising a property.”
But driving up ancillary revenue isn’t just about introducing new ancillary income channels; it also requires the optimization of existing channels. Peer-to-peer self-storage platforms like Neighbor can help you do just that.
With Neighbor’s platform, you can list vacant parking spaces at your property, approve tenants, and collect additional revenue without adding more stress to your day-to-day. If you want to see how much your space will rent for, get started today.
#7: Partner with Experts
Professionals have a knack for finding inefficiencies. They’re also good at being honest. Sometimes, an outside perspective is just what you need. These companies can evaluate your portfolio, identify areas for improvement, and recommend strategies tailored to your goals.
Whether it’s optimizing operations, repositioning the property, or improving tenant retention, they help clients avoid costly mistakes and ensure your efforts align with market trends.
#8: Monitor and Reevaluate
After implementing changes, track the asset’s performance regularly. Use this data to decide whether to hold, reinvest, or sell. The best way to improve the value of an asset is to track and monitor the right things!
When to Sell an Underperforming Asset
Not all underperforming assets can be turned around. If the property continues to lose money after implementing strategies, selling might be the best option. Selling frees up money and resources that can be reinvested elsewhere. Before selling, evaluate:
- The property’s potential compared to others in your portfolio
- The current market price and demand
- The cost of holding the property for one year versus selling now
Selling can be challenging, but it’s sometimes the right move for long-term growth. Accept that not all investments work out, and focus on using the proceeds to strengthen your portfolio.
Moving Forward
Identifying and addressing underperforming assets is an ongoing process. Regular evaluations (and the willingness to sell when needed) are essential to maintaining a healthy portfolio. Investors who remain proactive and adapt to changing factors will see better performance and greater total returns over time.
