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Types of Rental Property Investments to Avoid

By
Real Estate Agent with Keller Williams Realty Beverly Hills

The first and probably most obvious type of rental property to avoid is any property that would create a negative cash flow.  After all, it's called an "income" property.  A property that will cost you money each month is not a wise investment

Do not invest in properties that have upcoming costs or expenses that are not predictable.  Unknown or indeterminable costs can turn a profitable property into a costly endeavor that will cost you money month after month of ownership.  For example, if the city has stated that a new sewer line will be installed in the street there is no way to estimate what the cost might be to connect the property to the new sewer line.  It may be a very simple repair at little cost.  Or it could be a massive job requiring the removal of intrusive tree roots and rocks with could end up being a small fortune.  If there are any stated unknown upcoming costs on a property, pass it up and move on to something that is less risky.

Avoid properties that could be difficult to rent.  A vacant building will not be giving you the revenue you need to cover your mortgage and operating expenses, let alone make a profit.  Some locations might be inherently difficult to find renters for, depending on the proximity of roads, train tracks, or other noise factors.  Ask yourself if you would want to live in a place that had undesirable neighbors such as a junkyard, an extremely noisy nightclub, etc.  If the monthly amount you would need to collect is likely to be unattainable it would probably prove to be a bad investment.

Comments (2)

John Secor
EXIT Real Estate Results - Winter Springs, FL

James - there are a lot of factors that determine property value beyond cash flow.  Any property can cash flow with a large enough down payment.  Savvy investors go much deeper, cash on cash rate of return, equity rate of return, after tax rate of return etc.

Your example of sewer lines going in after purchase could likely be expensed or will be part of the property tax bill, usually a tax write off.  If your audience is first time or wanna be investors your info is good and appropriate.  For seasoned investors, not so much.  Best to you!

John

May 15, 2009 12:28 PM
Aaron Poling
Long & Foster - Martinsburg, WV
Working to get YOU the BEST Deal!

Your points seem to be common sense priciples but you would be suprised how many "investors" I deal with that buy negative income properties. They always have buyers remorse.

Jul 19, 2009 01:20 PM