Any investor worth his or her salt will tell you there are real estate investing scenarios and properties that will almost always lose money for you. For instance, timeshares as an investment are notorious for losing money. You have no idea how to calculate rents or other cash flow or costs. Timeshares almost always go down in value and if you even can find a buyer, the property sells for a fraction of what it was purchased for. Here are seven other real estate investments to avoid.
1. Investing in any property with negative cash flow is always a bad idea. Although negative amortizing mortgages are now illegal, there are still terms and conditions that can be written into contracts that suck out all of the cash flow and more.
2. Never invest in a property without understanding the comparables yourself. Certainly, any realtor is going to show you comparables that put your potential purchase in the best possible light. Do your own due diligence. And don’t only analyze the selling price. Do comparables on rents in the neighborhood as well.
3. Never invest based on speculation. I’ve seen people invest in new homes going up near a planned major construction site such as a big mall. The speculation was that as soon as the mall opened, people would pay a premium price for the convenience of easy shopping. Reality became that half way through construction the mall project went belly-up and was never finished. The value of the speculation home plummeted and could not be rented for anything near the cost of the loan.
4. Never invest in raw land. This is another purely speculative investment. You’ll have your money tied up in a property with absolutely no cash flow while still paying property taxes and other costs. These investments are only for people that can afford to never see their money again.
5. Never invest in neighborhoods with high crime rates and high vacancy rates. When there’s currently a tenant in place, these properties can appear very appealing because of high rates of return on the investment. Reality is often that the rent isn’t paid and the tenants have to be evicted. Once the property is vacant, it attracts squatters that completely vandalize the property. In the not so long term, these properties become worthless.
However, there can be a strong case made for buying in low income neighborhoods adjacent to the ganglands. Places where people have a job and mostly rent. These properties often sell for well below market value and can be rented to reliable people. Huge profits can be made if you can sell to these people by offering owner financing.
6. If it looks like a ponzi scheme, it probably is a ponzi scheme. These are investment groups offering ridiculously high returns on your investment. I’ve seen offers guaranteeing as much as a 50% return on investment in as little as 90 days. Hold on to your wallet as you turn and run away from these guys.
7. Don’t invest in properties based solely on current cash flow. Wholesalers and realtors are constantly touting rental properties based on current cash flow without accounting for future rehab. These are properties with a tenant in place that do have a reasonable cash flow at the moment. Be sure to consider the cost of rehabbing the property when the current tenant moves out to make it attractive to a new tenant.
This list isn’t comprehensive but it will give you an idea about common investment options that will almost always go bad for you.
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