So, what's a "Crocodile"?
If you're new to property investing, you might not have heard this term. But, it's worth getting to know it as it will help you visualize the problems you can get into when you "buy wrong".
I'm not sure if you've ever seen a real crocodile.... they're pretty scary. You don't want to get very close at all to a fully grown croc. If they get close enough to you they'll eat you.
Well, buying an investment property at the wrong price will turn that property into a crocodile that will eat you up.
How does it happen?
You pay what seems to be a low "sticker" price and forget to take into account items like taxes, insurance, a vacancy percentage, maintenance costs, management costs, etc. These costs exceed your monthly income and you have to keep "feeding" the fledgling little croc money to keep it happy. Without any cash flow, it's difficult to maintain the property adequately and condition suffers and tenants become unhappy and your vacancy rate creeps up. The little croc needs more money to stay happy. So, slowly but surely he's getting bigger & hungrier.
And... please don't purchase investment property with an adjustable rate mortgage (ARM). These products can really mess with your investment plans as, when the ARM kicks out, you might still be holding the property and you might not be in a position to refinance and the rate could be heading higher and higher and there might not be much you can do about it. What seemed like a nice little doggie when you first bought it can quickly turn into a nasty croc.
So... bottom line, flush out all the monthly, quarterly and annual costs involved with holding the investment property. Tot up all the income it can generate. Then see if the income covers the costs plus leaving you with some extra to put towards a maintenance fund and/or other projects. If it does... then, you might be onto a potential investment candidate.
I read this somewhere, can't remember where.... "you make your profit when you buy" and that's very true. To do it, just take enough time up front to do a decent analysis and you can save yourself many headaches down the line.
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