39 - Alligator Properties and How to Avoid Negative Cash Flow from Them
In this episode of Get Real Wealthy Season 2, Quentin talks about alligator properties and how to deal with them as a real estate investor.
Alligator properties are negative cash-flowing properties, and they can seriously hinder your real estate career if you are trying to grow a portfolio of properties. Taking about negative cash flow, he adds “If I buy a condo in downtown Toronto, and I put 80% down, then my condo and my mortgage fee is $2,000, and my condo fees are $500, and my property tax is $300, and my insurance is $100, and my rent is $2,500. I am losing money every month because I have to bring money to the table every month in order to be able to hold on to that asset.”
He says that sometimes what people will suggest you put more money down, but it is not a great strategy. You have to look at what you're investing in, and make sure that they are going to give you both cash flow, and appreciation. Negative cash flowing alligator property is a liability. It's not an asset, and we want assets. You should be able to leverage your properties as much as possible to have positive cash flow and continue to purchase assets because you have positive cash flow.
Quentin adds that when you are investing in a property, you should not be betting on appreciation, and increases in rental income, adding “it's not really an investment if you're putting money into it every month. That's called a liability.” It will also make it harder for you to get mortgages. The bank is going to look at your low debt coverage ratio, they would not want to give you more money. If for every dollar they lent you, you're making $1.20 or $1.30, they are more than likely to be able to give you more properties.
In conclusion, he says that if you're trying to build a portfolio of property, you need to be good with financing, and you can't be buying alligators. What you want to do is find cash flow and appreciation.
Important Links and Resources