WHAT IS Alligator Property
Alligator property is a real estate term that describes a situation in which the cost of mortgage payments, property taxes, insurance and maintenance on a rental property is greater than the income it brings in. If this situation is not corrected, it will eat up all of the owner's profit, leaving the owner with negative cash flow.
BREAKING DOWN Alligator Property
Alligator property is most commonly seen when a buyer purchases a real estate property during or near the peak of a real estate market cycle. In this case, the investor buys the overvalued building and rents it out, but as interest rates rise and maintenance costs add up, the owner must either sell the building or suffer a negative cash flow.
Negative Cash Flow and Alligator Properties
Cash flow is an important part of any business, including real estate property. Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a good investment should generate long term positive cash flows. At the same time, an investment that in the short-term experiences a negative cash flow can turn around and be income producing, or have a long-term positive cash flow.
In the situation of an alligator property, negative cash flow is a defining element. There are a few ways to turn an alligator property into an investment with a positive cash flow. One way to get around the negative cash flow situation is to buy property with a large down payment, thereby reducing the mortgage payment. An owner of an alligator property also may make capital improvements, thereby increasing the value of the property overall. This may also enable the owner of the property to charge higher rents, which will also increase the cash flow.
Real Estate Investing and Avoiding Alligator Property
Residential rental property can be an attractive investment to a diverse array of investors. Unlike stocks, futures and other financial investments, many people have firsthand experience with both the rental market as tenants and the residential real estate market as homeowners. This familiarity with the process and the investment make residential rental properties less intimidating than other investments. However, if an investor purchases the property at the height of a real estate market, not only may they be faced with the issue of negative cash flow, but they also will not benefit from real estate appreciation in the short term. Another issue with alligator property is that once it becomes an unattractive investment for the owner, it most likely is not an attractive investment for any potential buyers, and can be hard to get rid of.