The 6 Worst Types of Real Estate Investments
As any experienced real estate investor will tell you, not all investment properties are created equal. Homes that might be perfect for a primary residence, for example, might not yield positive cash flows — and without positive cash flows, you’re losing money, not making it.
Here are a few things to think about and properties to avoid when you are ready to invest your hard-earned cash equity capital.
1. Anything that doesn’t generate rental income
These include second homes and land investments. Too many people invest in properties hoping that they will go up in value. But there is an opportunity cost to having money sit in real estate that doesn’t pay any income. Even if the property goes up in value, you’ve got to reconcile and account for all the money you would have earned if your money had instead been in the bank or in stocks and/or bonds.
2. Anything with negative cash flows
If you buy a “prize property” — such as a fancy downtown fancy condo, beach property or vacation rental — it’s probably going to be 20+ years before you get your first dime of positive cash flow. And that’s just no way to invest your hard-earned money. Pencil out any potential deal ahead of time, and buy properties that pay cash flow from day one — the moderately priced properties in non-prize areas.
3. Tenant-in-common (TIC) investments
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 ever earned a dime because of all the costs and fees associated with the agreements.
4. Development deals
Development of land is extremely high risk. There are entitlement, construction and market pricing risks, plus countless others. These investments are best left to the extremely wealthy and experienced investors who can take the chance that they’ll never see their money again.
5. Condo-hotels, intervals & time-shares
These aren’t even investments. There’s no ability to predict cash flows, rental income or future value/sales prices. And they are very hard to resell and typically only at a fraction of the original cost.
6. Foreign real estate
You might be OK buying real estate in Canada or Britain – however don’t forget about the foreign currency risk — but foreign countries generally have different real estate laws, protections and fluctuating currencies, making these properties extremely high risk.
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at 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.