Any experienced real estate investor will tell you that not all investment properties are created equal. Homes that are ideal for primary residences, for example, may not generate positive cash flow – and without positive cash flow, you’re losing money, not making it. When
you’re ready to invest your hard-earned cash equity capital, read this write-up here for some things to consider and features to avoid.
1. Any property that does not produce rental revenue
These include second residences and land interests. Too many individuals buy real estate in the hope that it will appreciate in value. However, there is an opportunity cost to having money sit in real estate that does not provide any income. Even if the property appreciates in value, you must reconcile and account for all of the money you would have gained if your money had instead been invested in a bank, stocks, and/or bonds.
2. Anything that has a negative cash flow
If you purchase a “prize property,” such as a luxury downtown expensive condo, beach property, or holiday rental, it will most likely take you 20+ years to see your first cent of positive cash flow. That is just not the way to invest your hard-earned money. Plan ahead of time for any prospective deals, and acquire homes that provide cash flow from day one – the moderately priced houses in non-prize locations.
3. Investments in tenants-in-common (TIC)
These were popular from 2005 to 2007 as a method to diversify a portfolio without having to deal with the headache of owning and managing real estate. However, due of all the expenditures and fees involved with the agreements, few people actually made a dollar.
4. Development Deals
Land development is fraught with danger. There are hazards associated with entitlement, construction, and market price, among many others. These investments are best left to exceptionally affluent and experienced investors who are willing to bear the risk of never seeing their money again.
5.Condo-hotels, intervals, and timeshares
This isn’t even an investment. It is impossible to forecast cash flows, rental income, or future value/sales prices. And they are extremely difficult to resale, usually for a fraction of the initial cost.
6. Real estate purchased for the purpose of appreciation
Astute investors with a keen sense of Ffuture trends have occasionally made a fortune by acquiring undeveloped land with the intention of selling it when values rise. A successful example of this may be seen in the Seattle region, just east of Lake Sammamish. This area, from the lake to the Cascades, was rural in the 1970s and earlier, with few dwellings and a handful of tiny settlements.
However, just as many—if not more—purchasers of undeveloped land have lost everything. They bought raw land
in the wrong area and at the wrong time. Unless you have prior expertise in forecasting an area’s future growth and development, this is probably an investment approach to avoid.
You’re looking for a home to invest in or to live in. In a neighborhood of three-bedroom bungalows, a lovely five-bedroom
two-story appears on the market. The house not only has enough space for a large family, but it also has a built-in swimming pool in the rear! The pricing appears reasonable considering the square footage of the property, yet it is
more expensive than other houses for sale in the neighborhood due to its size.
Such a purchase may be appealing, but consider if it will increase in value in comparison to other properties in the region. Also, keep in mind that there are no guarantees that the rest of the neighborhood will improve. Will potential buyers prefer to reside in a bungalow neighborhood if you decide to sell your lovely five-bedroom two-story with a built-in swimming pool?
8. Foreign real estate
You could be OK buying real estate in. Canada or the United Kingdom, but keep in mind that foreign nations often have distinct real estate regulations, safeguards, and shifting currencies, making these assets are exceedingly risky.
End Note
The fact is that if real estate investment were easy, everyone would do it. Fortunately, many of the difficulties faced by investors may be avoided with due research and appropriate preparation prior to signing a contract
