Although investing in rental properties stands to enrich you via passive income, not every prospective investment is an automatic winner. As many first-time investors learn the hard way, some rental properties can ultimately cost you a lot more than they stand to make you. So, if you’re fairly new to real estate investment, it’s important to learn to recognize red flags and know when walking away from a deal is the best course of action.
Repair and Renovation Costs Are Excessive
Many of the rental properties you come across are going to be in need of some degree of repair and/or renovation. While a small to moderate degree of repair/renovation should be expected, properties that require large-scale work should be approached on a case-by-case basis. For example, if a property that requires a significant amount of work is located in a popular area with high rental rates, you may ultimately see a healthy return on your investment. On the flipside, if the property in question is found in an unpopular area with fairly low rental rates, big-ticket repairs and/or renovations probably aren’t worth your time or resources.
Seasoned investors often advise against making a fixer-upper your first rental property. Whereas more experienced investors are likely to have a solid understanding of how to approach such properties, many fledgling investors simply aren’t ready to tackle the arduous task of making a fixer-upper profitable. So, if you’re currently in the market for your first rental property, you’d do well to walk away from fixer-uppers.
Additionally, when dealing with any rental property, you’ll need to take management and upkeep costs into account before getting started on any paperwork. By extension, you should also consider insurance costs. Since you won’t be able to apply homeowners insurance to a rental property, take care to find a good landlord insurance policy.
Local Rental Rates Are Too Low
The location of a rental property is every bit as important as the condition of the property – if not more so. With this in mind, take care to research local rental rates before proceeding to make an offer on a property. Should you discover that rents in the area are well below what you’re hoping to make from the property, walking away may be the best course of action.
You should also be careful about purchasing properties in areas with slow growth rates, poor job markets and high crime. Even if a property is spacious and full of amenities, it’s likely to have trouble commanding a high rental rate in such a locale.
The Seller is Uncomfortable with the Property Being Inspected
Every rental property in which you invest should be thoroughly assessed by a seasoned home inspector. This person will be able to seek out and identify a wide range of issues. From structural damage to plumbing problems to electrical issues, a good home inspector can provide you with a solid rundown of a property’s shortcomings. Needless to say, any large problems the inspector comes across stand to impact the amount you’re willing to offer. For example, if an inspection turns up a number of hitherto-undiscovered issues with a property, you’d be more than justified in requesting that the asking price be reduced.
For this reason, you may find that certain sellers are hesitant to allow inspections. In some instances, this is because they’re actively trying to hide problems. Other times, they’re afraid of inspections revealing the presence of problems of which they weren’t previously aware. However, regardless of the seller’s reason for wanting to forgo an inspection, this should be taken as a serious red flag. If they’re not willing to have the property inspected, it’s reasonable to assume there are problems they’re trying to conceal. Rather than attempt to negotiate with people who exhibit this behavior, you should simply walk away and turn your attention to other single-family rental investment opportunities.
While success can certainly be achieved through investing in rental properties, it is by no means guaranteed. Simply assuming that every prospective opportunity will pay off is pure folly on the part of investors, and committing to purchase a property without doing the proper research can facilitate tremendous regret. As such, it’s imperative the fledgling investors learn to recognize a variety of red flags and educate themselves on when it’s appropriate to walk away from an opportunity. New investors looking to learn the ropes would be wise to remember the pointers discussed above.