Navigating the world of real estate investments can be a arduous task, to say the least. While it’s said to be one of the best sources of passive income (and it is!), that doesn’t mean that investing in real estate is always easy. Honestly, being a real estate investor can have difficult moments. You’ll have ups and downs and face daunting challenges. While some of the pitfalls of investing in real estate are impossible to avoid, there are some that you can.
Don’t waste your time, energy and capital on bad real estate investments. Be on the look out for these bad investments — so you can steer clear of them. Bad investments can come in many different shapes and sizes, but area almost always characterized by poor location and poor renovation work. When the two are combined, an investor can be in for a real whirlwind.
But there are other forms of bad real estate investments and most are the type that investors will "justify" buying. They look great on paper, come dirt cheap, provide a great place to vacation once a year or some other justification answer. The reality is that real estate investing is simple. Have great management (even if you are managing yourself), avoid delaying work or deferring maintenance and purchase a property where you know the monthly rents not only cover your expenses, but allow you to put aside additional money as an investor as well. Here are some tips for avoiding these kinds of investments.
Types of Real Estate Investments to Avoid
Anything with Negative Cashflow
Stay away from “prize” investments like expensive downtown condos and vacation rentals. It would be a long time before you saw any positive cash flow from these kinds of properties. You’re better off putting your investments in moderately priced properties.
If a current property dips into negative cashflow for a month or two, it usually isn’t the end of the world. However, if the property is draining your resources month after month with no recovery in sight, you may need to let go. Not all properties start off with negative cashflows — just avoid those that do and discern when you need to sell a property that’s holding you back.
Properties Without Rental Income
If you’re holding on to second homes or land in the hopes of reaping the benefits of an appreciation in value, it's a risky move. Having a lack of rental income is an inefficient real estate investment, particularly when you could make more by simply having your money earning interest in the bank or in stocks and bonds. If you’re holding on to empty properties for yourself, you may be able to get returns going by readying that second home to be rented out.
Foreign Investment Properties
While you may be prepared from a language standpoint to invest in, say, Canada or Britain, foreign investing comes with a whole new set of headaches that you don’t have to deal with in your home country. You’d be contending with currency conversions, different real estate laws and an entirely different economic system. The risk for foreign investments, in most cases, is too high to be worth it.
With these sort of “investments,” there’s no reliable way to predict cash flow, rental income or future values. In most cases, they’re hard to resell, even for less than you paid for it. Avoid timeshares and intervals for the sake of your sanity...and your wallet.
Tips to Avoid Bad Real Estate Investments
- Never buy based on speculation.
- Avoid high-crime and high-vacancy areas, even if the cashflow looks nice.
- Don't buy a property based on current returns without considering needed renovations.
- Don't buy without knowing and understanding what repairs are needed.
- Never invest outside of your means.
- Know what your level of risk tolerance is.
- Use your connections, mentors and colleagues to your advantage. Their knowledge and experience can help you avoid big mistakes.