Alligator Property

An alligator property is an investment property that costs its owner more than it brings in. It’s called an alligator because—you guessed it—it will eat up the owner’s profits unless you can regain a balance between cost and income.

To know whether or not an investment property is an alligator, you have to do more than simply compare the monthly mortgage to earned rents. Costs include mortgage, taxes, insurance, and maintenance. By totalling the annual costs and comparing that number to the annual rent, you can decide whether or not your rental property is about to eat you out of your own house and home.

How do people end up with alligator properties? Usually by buying a property when costs are at the top of a cycle, or buying with a small down payment (making your monthly mortgage rates higher). To avoid this situation, try to avoid purchasing overvalued properties and make the highest down payment you can afford. In a strong housing market, it might even make sense to hold off on purchasing a rental property until you can make a higher initial investment.