Real estate investing is both a money maker and a money loser. Speculating on the future of an area can lead to great rewards or great financial losses. Want to get a better feel for mistakes to avoid? Here is a brief list of five (and a half) property red flags for rental property investors.
Red Flag #1: House is selling slowly
The time it takes for a house to sell varies greatly on location, price and circumstance. Nearly identical brownstone walk-up homes in Brooklyn can sell at very different speeds depending on their actual location, for example.
If you are looking at a house that is selling very slowly in a fast moving market, however, I would urge caution. If nobody wants to buy it, do you think anyone will want to rent it? Unless you have a very strong idea of what is wrong with the house, assume the market knows best. Stay away from the duds unless you intend to renovate extensively.
Red Flag #2: House is being sold as is
This is self-explanatory. A house sold ‘as is’ is no different than anything sold without a warranty. The seller is telegraphing that there are issues and they want no part in fixing them.
That should raise red flags. Whatever issues exist will be yours to fix and repair. Even with a discovery of issues later, you will have no recourse. Buying ‘as is’ means you have no safety net in case of a disaster.
Maybe the price is so great you can fix the issues and still get some rewards? A fair idea, but what do you do with the tenets? If you have not realized already, there are a number of tenant protection laws you need to worry about.
Remember that list while you buy the property that may or may not have mold, may or may not have water leaks, gas leaks, etc.
Red Flag #3: Bad neighborhood
You know where there’s plenty of cheap property? Camden.
You know where you should not own property? The vast majority of Camden.
Camden is an extreme example, of course. Even with improvements, the reputation and stain of crime will haunt the city of Camden for years to come.
The worse an area is, the worse its services will be. That means terrible schools, terrible restaurants, no cultural destinations, etc. Parts of Philadelphia will take years to improve. Parts of northern New Jersey and New York will also take years to improve. Brooklyn needed close to a decade of ‘gentrification’ before the real estate market took off.
Unless you are willing to really stick it out, long term, rental properties in bad areas are not a great investment opportunity. You will struggle to fill your properties, and you will struggle to fill your properties will less qualified rental applicants.
Red Flag #4: City / regional decline
Make sure you understand the demographic shifts of your area. People are leaving California. The city of Chicago is seeing a population decline. Businesses are leaving the rust-belt for friendlier areas in the American southeast.
While most of the northeast is relatively safe, some areas are better than others. You may find New Brunswick offers excellent opportunities as the town develops into a city in the middle of New Jersey. You may also find that areas directly north of Philadelphia are starting to become commuter regions.
Avoid areas of decline like the plague. Want an example of a shrinking city? Try Pittsburgh.
Red Flag #5: Profitability
Let’s say you’ve gone through all of the other steps and everything looks good. Finally, you’ve found your property!
Upon closer inspection, however, you realize that to actually get some profits out of this investment property, you will need to charge more than market rate for a few years. In short: you cannot afford this house because the numbers simply do not add up.
Unless you intend to use the rental property as something of a bond, i.e. waiting until “maturity” (sale) to get a profit, monthly rent checks are a part of the equation. If you are looking at taking a loss until you sell the house, years into the future, you should not buy the property.
Bonus Red Flag: Property Management Turnover
This is something of a special case, but it is worth looking at.
Has the property been managed, and if so, how many managers has the property had? There are only two acceptable answers: none or one, within a two or three year span. A few in a few years would be a massive red flag.
Property management companies typically make money with volume. Keep the apartments full and the maintenance low and it can be profitable. If multiple companies are coming in and out, either the apartments are not full or the maintenance costs are piling up.
That would be a red flag indicating that it is a poor real estate investing property.
Either of those scenarios are trouble.
These are just a few things to keep in mind when looking at your real estate investing property. You already know that there are great rewards to investing, but also great risks; avoid jumping into something that can cause your finances to drown.