Getting Eaten Alive by an Alligator Property?

by Investing School on July 22, 2011

Unless you have been hiding away in a hole for the last few years, you have to know about the mortgage crisis. Many people invested in more house than necessary, paid handsomely for the properties and when house values crashed ended up “upside down,” owing more than the house was actually worth. Such a property may be called an alligator property, but the expression has a more common application.

Generally speaking, the term is reserved for investment and commercial properties. The mortgage, taxes, insurance and maintenance costs have exceeded the income, eating up all of the owner’s profits. How does this happen to normally savvy real estate entrepreneurs? They purchase a property just as the housing market peaks, unknowingly of course, and then, as values fall and costs increase, the owner is put in the position of suffering from a negative cash flow. They can either accept this as a hopefully temporary solution or sell the building at a loss.

A common way to avoid the negative cash flow problem is to make the purchase with a large down payment. By decreasing the cost of the mortgage a real estate investor is less likely to run into costs they can’t cover.

If you are interested in real estate investment it is important to look at the financial records of any given property before you make an offer. Nothing is worse than ending up upside down simply because you didn’t do your math or take in to account the potential for the market to deteriorate.

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