Real Estate Investments are tricky things, and while a property might seem like the perfect investment, given the rate of market growth in an area, the equation isn't as simple as, “Will the value be greater in a year?” or “Will I find a Tenant that can pay more then current rent?”
So…..When Should You Walk Away from an REI Deal? Think about these factors:
1. What is the potential income generation?
If the property promises to make you money sometime down the road, but isn't going to pay out on a regular basis in the meantime, walking away from this investment is likely the best move. Rather than invest funds into a non-income generating asset, perhaps a better move would be to evaluate other options for a guaranteed payout on a regular basis.
2. Is this going to be a negative cash flow situation?
If you are looking at property that is highly prized, the chances of a positive cash flow for a number of years is low, given the premium on the price tag. Rather, looking into property that is more moderately priced and in slightly less popular locales might be the way to invest. Also worth considering is the amount of additional funds that will be needed in order to make the property valuable to occupants before the cash will start coming in. While this is a long-term planning tool, it is quite important to do all of the figuring up front before investing anything.
3. Is it a Development Deal?
There are so many risks involved in development deals that it is often best to walk away from them unless you are prepared to face the additional chance that something could go very wrong during construction. Between entitlement, construction pricing risks, and other real estate unknowns, the liability is high and the benefit potentially much lower than anticipated.
4. Is the deal in another country?
While some property in countries that are very similar (Canada, United States, and Great Britain, for example) might be a less risky investment, there are always differences in legal settings that can make these investments unwise, or at the very least far more expensive from a legal standpoint. Also of note are the constantly changing currency fluctuations between nations. This adds an additional layer of complexity to the potential return you will see on an investment.
While Real Estate Investments are certainly a way to diversify your personal portfolio, a wise investor remembers that sometimes risk is too great for the potential payout. Beware of the cost-benefit ratio of each property you consider.