Real Estate Term of the Day : Alligator Property
An Alligator Property is a term used in rentals, wherein the cost of maintaining a rental property are more expensive than the income it brings in. The landlord will end up with a negative cash flow unless they can sell the property. This is seen most often when an investor buys a property at the top of a real estate cycle, making it an overvalued property.
A way to avoid this as a landlord is to buy property with a large down payment to reduce the mortgage, that way the payments will be less affected by inflation and adjusted interest rates. Another way to avoid it is to make capital improvements to the house regularly that allow you to increase the rent over time, adjusting for rising rates. This will improve the state of cash flow before things get out of hand.
It is important to do your research on not only the property and the neighborhood you are interested in acquiring to rent out, but also the market and the rates so that you can be prepared with your mortgage payment. The biggest problem with Alligator Properties is that they are hard to sell, because once it has become a bad investment for the owner it is likely to come across as a bad investment to any potential buyers looking to do the same thing.