As any seasoned real estate investor will tell you, not all investment property is created equal. Homes that might be perfect for a primary residence, for example, might not generate positive cash flow – and without positive cash flow, you lose money, you don’t earn it.
Here are some things to consider and properties to avoid when you’re ready to invest your hard-earned equity.
1. Anything that does not generate rental income
These include in particular second homes and land investments. Too many people invest in properties with the expectation that they will rise in value. But there is an opportunity cost to having money in real estate that doesn’t earn any income. Even if the value of the property increases, you must reconcile and account for all the money you would have made if your money had been in the bank or in stocks and / or bonds instead.
2. Anything with negative cash flow
If you’re buying a âpriced propertyâ – like a chic downtown condo, a beach property, or a vacation rental – it will likely take over 20 years before you get your first penny of positive cash flow. And that’s just not a way to invest your hard earned money. Weed out any potential deals up front and buy properties that earn cash flow from day one – the moderately priced properties in the no-priced areas.
3. Joint tenant investments (TIC)
These were popular from 2005 to 2007 as a way to diversify a portfolio without having to deal with the hassle of owning and managing real estate. But few people have ever made a dime because of all the costs and fees associated with the deals.
4. Development agreements
Spatial planning presents an extremely high risk. There are rights, construction and market price risks, as well as countless others. It is best to leave these investments to extremely wealthy and experienced investors who can take the risk of never seeing their money again.
5. Condo-hotels, intervals and timeshares
They are not even investments. There is no way to predict cash flow, rental income or future value / sale prices. And they are very difficult to resell and usually at a fraction of the original cost.
6. Real estate abroad
You can buy real estate in Canada or Britain – but don’t forget the currency risk – but foreign countries usually have different real estate laws, protections, and fluctuating currencies, which makes these properties extremely risky.
Leonard Baron, MBA, is American real estate teacherÂ®. Its unbiased, neutral, and inexpensive handbook âReal Estate Ownership, Investing, and Due Diligence 101â teaches real estate owners how to make smart and safe buying decisions. He is a lecturer at San Diego State University blogging at Zillow.com and loves kicking the tires off a good piece of dirt! More information on ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.