Real estate investing has historically seen high returns. Residential homes typically have lower returns than commercial properties, but they can still be valuable assets in many investment portfolios.
But investing in real estate isn’t always the right call. In some cases, it’s more likely to set you back financially — or otherwise be an unwise move — than it is to boost your portfolio.
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GOBankingRates spoke with several real estate investing experts to find out when investing in real estate might be a bad idea financially. Here are some of the top signs.
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“Buying property can be a good business endeavor, but in certain situations, it can also take a toll on your finances as well,” said Nathan Richardson, founder of Cash For Home.
If cash flow is already lacking, purchasing property will likely only set you back even more.
“Most of the time, buying property comes with unforeseen costs, such as maintenance, repairs or even trying to find tenants to occupy the property,” Richardson said. “With no cash buffer, the smallest costs can arise and be assumed as a debt.”
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Having good credit is key to getting a loan with good terms and rates. If you have poor or spotty credit, you might not qualify for financing. And if you do, you might end up with a high interest rate or limited terms.
A higher interest rate in particular can affect your profits, according to Richardson. Say you’re spending $400 on interest each month but your rental income (after all other expenses are taken out) is only $500. Your total profit is just $100. This might not be a financial setback, but it can limit growth potential.
Perhaps unsurprisingly, any property that’s a fixer-upper is likely to also cost a lot of money in repairs and renovations. If you don’t already have decent cash flow, this can definitely set you back financially.
“If a property is going to require a lot of repairs, whether it’s a fixer-upper, an old home or simply a property that’s due for a lot of repairs in the near future, that could be a sign that it will set you back financially,” said Adam Hamilton, CEO of REI Hub.
Investing in a fixer-upper could pose a lot of risk. “Some properties, due to their condition, will require a lot more from an investor to become habitable, since they are the ones legally and financially responsible for those things,” Hamilton explained. “That’s why fixer-uppers in particular are often such a major risk and should be carefully assessed before investing in.”
