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Real Estate Investment Software Blog

Real estate investing has a number of key terms used by insiders to categorize various kinds of real estate investment properties according to the different goals a property might serve, depending on the method of acquisition and holding period.

As a real estate investor, the investment property you currently own undoubtedly falls into at least one of the following four categories and chances are you might not even know it. If you are not acquainted with these terms and are prone to learn, then this one is for you.

Downside Risk

Simply put, the downside risk of an investment is when the investment does not reach the potential the investor expects. If you are about to purchase an income-producing property based on raising the rents in six months, the downside risk is that in six months the rents and monthly cash flow do not reach the level you are projecting. Obviously, each investor must decide what is acceptable to balance the upside potential.

Pattern of Growth

This is the trend of growth in any given area. It is important for investors to ensure that the property acquired fits into the current and pending pattern. Purchasing an apartment complex 10 miles from the nearest shopping should not expect to increase much in value unless you see a clear and present trend of growth toward that property.

Single-Purpose Use

Single-purpose use refers to one likely (or reasonable) use of the property due to zoning or building design. Land zoned for “single-family homes” or a building clearly designed for a fast food operation generally fall into this category because the amount of money and time it would take to alter the property to accommodate another use would not be reasonable.

Multipurpose Use

In this case, zoning and building design add flexibility to the use of the property. For example, with the right zoning, an investor might purchase a house as a residential rental and then eventually demand higher rents by converting it into a medical or professional office.

Alligator

Income-producing property that costs more to hold than it benefits is an alligator; it simply lays there and eats. Often tolerated in situations where the property value expects to increase, the investor agrees to accept a negative cash flow and thus “feed the alligator” until it does.