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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.
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.
Also see the key to real estate investing success and eight ways to find it.
Cash Flow Is Already Limited
“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.”
Your Credit Is Spotty
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.
The Property Is a Fixer-Upper
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.
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“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.”
Time Is Limited
Investing in real estate is time-consuming, so if you don’t have a lot of time, you could face problems down the line.
“As a rule of thumb, buying a property should never be done if time is an issue,” Richardson said. “This is because buying a property is time-consuming, whether finding tenants, doing repairs or even trying to market the property … If you do not possess ample time or your schedule is too busy, it can lead to mismanaging the property and losing money.”
You Need To Buy Multiple Properties for the Rental Income
You can earn supplemental income from rental properties. But if you’re going into it with the hopes of purchasing multiple properties and living off the investment income right away, you might need to reconsider.
“Real estate is a long-term game of building wealth through mainly cash flow, appreciation and depreciation. For someone just starting out, unless they are buying a 16-unit or bigger, then that first rental isn’t going to provide much cash flow, and if they are lucky, they will [see] $100 per month in free cash flow,” said Holden Andrews, a real estate investor and founder of Helpful Home Group.
You Have Other Major Debts
Juggling multiple loans or credit cards is tricky enough without adding a new mortgage loan to the mix. If you already have a lot of debt, now might not be the best time to invest in real estate.
According to Richardson, you might not want to invest in real estate if you already have a mortgage, a high credit card balance or student loans.
“If you are adding a property loan alongside existing loans, it can spread your finances to a limit,” he said.
You Haven’t Done Enough Research
As with any investment, real estate carries its share of risks. If you haven’t done your research, whether that’s consulting with real estate experts or simply studying the local market, you could be in for a few surprises.
“Real estate has been the best tool that I’ve found to make the average person wealthy, but it is hard work,” said Ryan Dossey, co-founder of SoldFast. “Real estate takes credit, capital, time, effort, expertise and grit to be profitable.”
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