Quality rental properties can bring in a steady flow of cash as you pay down your mortgages. Some properties won’t no matter what you do because of certain flaws, and many of these can be seen during your research or a visit. Unfortunately, unlike broken windows or messy front yards, these “red flag” problems aren’t easily fixed.
Whether you’re buying for the first time, or you’ve had years of experience buying rentals, take a look at these signs that a property probably won’t bring you a great return.
Analyze the criminal activity in the surrounding area. Look for “war zones” where the crime rate doesn’t decrease, or has even increased over the years. Sadly, properties in these areas will end up costing you more in the long run. Units in unsafe areas generally command lower rents, but the maintenance costs are the same no matter what neighborhood you’re in. You’ll also find that you cannot attract as many high-quality tenants because they, too, will be looking for safer areas. You might make tenants feel more secure by installing cameras and alarms, but it won’t make the actual crime go away, and you might end up paying more to repair vandalized exteriors or replace stolen property.
If you don’t want to live next to a factory, landfill, or otherwise smelly or polluted place, chances are your tenants won’t want to, either. If the property is located near wetlands or low-lying areas, see if water damage has occurred and look for historical data about flooding in the area. Also, take a look at the infrastructure of the area. Bad roads, shuttered businesses, and public works in disrepair show that the area is in decline.
Unfortunately, areas with higher crime rates often coincide with terrible school districts. While this isn’t an absolute deal breaker, particularly if there are private schools in the area where people send their children to, if you want to rent to families, it is unwise to buy a property with a bad school district.
With one-bedrooms units, you won’t attract any families, and you will usually attract people who don’t intend to stay very long. Even two-bedroom houses and apartments can be risky for much the same reason.
Buying a very large property (3,000 square feet or more) will cause problems as well. People who are looking for properties of this size are generally looking to buy them. Most people don’t have the money to rent a large property by themselves, particularly if it’s unfurnished, so you’ll end up with larger groups of roommates that might create more maintenance problems. (The larger size on its own multiplies the need for ongoing maintenance.) It’s also difficult to rent a large house in an area full of smaller ones.
This same idea carries over to larger lots with a lot of outdoor space or rural properties. All of that outdoor maintenance will fall to you most of the time, and neglected yards can result in citations.
When potential tenants see very small bedrooms, they start to feel claustrophobic and can’t imagine living there. Tiny kitchens, unless the person has absolutely no plans to cook, are also a real turn-off because everyday tasks are made more difficult in such a small space.
Awkward floor plans are also difficult to remedy or gloss over. If there’s only one bathroom next to a kitchen, or if you have to access the living room through a bedroom, then you will have a very hard time marketing your unit to high-quality tenants who can afford to go elsewhere. Of course, you might be able to take down a wall or move some plumbing around to fix these problems but this should be taken into account when deciding what you’re willing to pay for the property.
Speaking of too small, one thing that will make a rental seem impossibly small is a lack of storage space, particularly in houses without garages, bonus rooms, or basements. If it’s a house with a yard, it can be as easy as adding a shed in the backyard, but if you live in a cold-weather area, this is impractical.
Before buying a rental property, research all tenant-landlord laws in that municipality. Some cities require annual inspections of all rental units, which creates extra costs. Some cities have very strict eviction laws that make it all but impossible to get rid of a non-paying tenant in less than three months.
If you’re unable to get all the answers you need from the seller, they might be hiding some negative information about the property. Ask about vacancy rates if the property was previously rented. Ask why the seller is selling in the first place. Demand access to all parts of the property; any areas that are covered up or locked are suspect. Another deceptive tactic is to hide flaws through “creative photography.” The listing might seem stingy with photos, or have photos of the exteriors only.
Of course, an inspection is all that’s needed to clear up these issues, but shady sellers will claim that you can’t get your own inspection because it’ll take too much time, or they’ll imply there are other buyers willing to go forward without an inspection. If the owner seems pushy, nervous, or difficult to reach, it’s probably best to step away.
One Last Red Flag
Remember that in addition to the mortgage payments, you’ll have to budget for regular maintenance, marketing, taxes, and other fees. If all of your calculations say that you won’t make any return on the property, and that your expenses will overwhelm your profit, this is the biggest red flag. Generally, if you aren’t making a profit from the very beginning, and something major happens (a burst pipe, for example) you will be in the hole.
Buying any property is an arduous task, but extra care should be taken when buying a rental property. Resist pressure from sellers until you have done your due diligence. The red flags listed above don’t always doom a property; however, properties that do have some of these qualities are better left to real estate investors with more resources and experience.
Are there any red flags we missed? Comment below and tell us your story.