When you buy an investment property, you’re doing it to make money. But even if you go into the situation with the best intentions — and the expectations to make some serious cash — it doesn’t always work out that way. Approaching real estate investment in the wrong way can lead an investor to go bankrupt.
And the top reason most investors end up with a property that bleeds more money than it ever brings in?
Speculation is the single biggest reason investors go broke. It’s a recipe for disaster, and if you want to make money on your investment properties, you need to avoid it at all costs.
In case you’re not sure what we mean by speculation, let us explain.
The way you get in trouble with speculation is when you buy a property based on the amount of money you believe it will make in the future — instead of evaluating it based on the amount of money it will make today.
For example, you might look at an investment property that’s been appreciating at a steady rate for the past four years. You think, “Well, it’s been appreciating steadily, so I assume it will continue to appreciate at that same rate.” So you evaluate the profitability of the property based on the assumption that it will continue to appreciate and buy it because, if it appreciates as expected, it will be a profitable investment.
But there’s no way to know whether that property will continue to appreciate. And if you ran your numbers based on that assumption, when it doesn’t pan out, you’re in trouble — and stuck with a property that bleeds your cash flow every month.
Moral of the story: buying a property based on the potential you believe a property has in the future isn’t a sound strategy. Instead, you always want to buy properties that will generate cash flow in the present.
How to Avoid Getting Stuck With a Negative Cash Flow Property
So speculation is the #1 reason investors go bankrupt — which means, if you want to stay in the green, you have to avoid buying based on speculation at all costs.
But how, exactly, do you do that?
Making buying properties with a positive cash flow a non-negotiable
Only buy properties that generate a positive cash flow on day one. No buying a property that you think has potential, no buying a property that you hope will become profitable in the future, no buying a property and crossing your fingers you can increase the rent in a year or two.
Positive cash flow is the most important factor to consider when buying investment property. The only way to make money as a real estate investor is to buy properties that will generate cash NOW. Your goal should always be to make money with a property, so set your profitability goals at the beginning of your property search and then stick to them. Don’t get lured in by the “potential” of a property — because if that potential doesn’t pan out, you’ll be the one stuck fronting the bill.
Before you buy, assess how much money you stand to make from the property. If there’s no cash flow, there’s no purchase.
Be careful with where your information is coming from
Another thing you have to be mindful of if you want to avoid getting stuck with a property that threatens to send you into bankruptcy?
Where your information is coming from.
Not all agents have your best interests at heart. If a selling agent gives you inflated comps and makes you believe the rental potential for a property is higher than it actually is, you can find yourself stuck with a property that bleeds your accounts dry.
Don’t take the selling agent’s word on how much you could make from a property. Do your research. Talk to property managers. Get a more comprehensive and unbiased view of the real rental potential of a property before you make a purchase.
Don’t let your emotions get the best of you
A lot of investors get into trouble because they trust their emotions more than they trust cold, hard facts.
You might fall in love with a property and truly believe that it will make money. But if you don’t have any data to back it up and buy purely based on emotion, you put yourself at risk of investing in a property that will cost more than it makes.
When it comes to buying property, stick to the facts. Don’t let your emotions get the best of you.
What to Do If You’re Already Dealing With a Negative Cash Flow Property
Now, all of this information is great to know. But if you’ve already bought a property based on speculation — and that property is threatening to send you to bankruptcy — it’s not very helpful. So let’s talk about what to do if you already have a property in your portfolio that’s eating up your cash flow.
The good news is, you’ve got options.
First, you could refinance your mortgage to try to bring down your monthly payments and get yourself out of the red. If that’s not an option, your best bet may be to cut your losses, sell the property, and reinvest those funds into a positive cash flow property to get yourself back on track.
Buying a property based on speculation is a huge gamble — and it’s a gamble that very rarely pays off. If you want to protect your investments and make sure your portfolio continues to make money, make it a rule to only buy properties that will generate cash from the get-go.