10 Off-putting Property Investment Red Flags
Investing in property may set you up financially for the rest of your life. It could also lead you to financial ruin. Look for these property investment red flags to avoid that situation.
Why is property a great investment?
When you get it right, property investment offers a stable income over a long period of time. The market moves slowly enough for you to adapt to changes. Plus, your work combined with inflation usually means you make a profit when you decide to sell.
That is, as long as you’ve avoided the property investment red flags.
Not all property investment opportunities offer equal rewards. In fact, a combination of bad research and poor timing could lead to you losing money on the investment.
You need to know about these red flags to avoid making property investment mistakes. Here are 10 of them.
Property Investment Red Flag #1 – The Numbers Don’t Mesh
Investing in property is the same as running a small business. The numbers all need to add up, else you won’t generate a profit. This requires research on your part. The cost of the mortgage is only the first cost that you must consider. Investors also have to account for ongoing maintenance, advertising costs, and other fees. These all drain your resources.
Make all of these calculations ahead of time. You’ll already have a budget in place to handle the purchase, but look beyond the initial costs. Ask yourself one question: will the money I earn each month cover my costs.
Your figures may show that it won’t. That’s a huge red flag. Continuing with the investment after that sets you up for failure. Even if the property has potential to improve, you still need it to earn enough to cover you while you make those improvements.
Property Investment Red Flag #2 – It’s Been on the Market for a While
Let’s preface this by saying that not all properties that haven’t sold after several months make bad investments. Your research will let you determine the property’s value. However, it is a cause for concern.
If the property has been on the market for a while, the price may be the problem. Avoid buying if the seller won’t negotiate. This suggests that they’ve overvalued the property and other potential buyers know it. If you go ahead, you’ll likely end up paying more than you should. This puts you on the back foot immediately when you’re trying to make money.
There are other reasons that a property won’t sell. An inspector may have spotted structural damage, meaning the property costs more money to bring up to code. It may also be in a bad location. A small apartment in a suburban community won’t appeal to family buyers, for example.
Simply put, there’s probably a reason why it’s been on sale for so long. Find out what it is before proceeding.
Property Investment Red Flag #3 – Trust Issues
This is a particularly important problem when buying straight from a developer. New property developments open up opportunities. If you get in early, you may secure a property for a bargain price. You stand to benefit if the development takes off. Sometimes, a new property development spurs on other improvements in the area. These lead to growth, which investors capitalize on.
Importantly, you must trust the developer for this to happen. This means running checks on their background to look for any signs of bad activity. These may include fraud or failure to protect investor interests.
Any such signs should give you pause for thought. If the developer has a track record for untrustworthiness, do you really want to give them your money? Can you believe that the property offers what they say it does?
If the deal seems in any way untoward, don’t go through with it. It could cost you your entire investment.
Property Investment Red Flag #4 – The Crime Statistics
You’ve spotted a property and it looks like a bargain. The seller wants to get rid of it as soon as possible, and you’re attracted to the opportunity.
Any time that happens, stop to think of the reason why. High crime levels often result in sellers asking less than they otherwise would for their properties.
Check the crime statistics for the location before moving forward. Lots of crime serves as a red flag on its own, but you must also think about how it will cost you in the long run.
For one, potential tenants don’t want to live in areas that have high crime rates. Their security is paramount, so they’ll look for other options.
Installing security measures at the property may help. But this also adds to the overall cost of buying it. Plus, heavy security doesn’t exactly make a house feel like a home.
Finally, you may become a victim of crime yourself if you invest in such a property. Theft could cost you thousands of dollars each year. The low rents that such properties command often won’t cover the costs.
Property Investment Red Flag #5 – Evasive Seller’s Agents
You’ll likely have a buyer’s agent to hand to help you with your research. However, that doesn’t mean the seller’s agent can avoid your questions. Ask pointed questions, even if your own research has already revealed the answers.
Here’s why this is important. Seller agents work towards the best interests of their clients. However, you want to establish that they’ll be honest in their dealings with you. Asking about vacancy rates and local statistics shows you just how much you can trust them.
A good seller’s agent will confront the question head on. They’ll talk about any issues the property faces, and may even suggest some solutions.
Bad agents try to evade the questions. They won’t offer up any hard facts when asked and may try to baffle you with jargon.
No property investment that starts with guesswork can have a good conclusion. If the seller’s agent isn’t forthcoming with the information you need, look for other opportunities.
Property Investment Red Flag #6 – You Can’t Get an Inspection
In general, obstructive sellers throw up all sorts of red flags. However, the worst are those that won’t let you get your own inspection.
Some sellers dress this up as trying to get the deal done quickly. They may put pressure on you or hint that they have other buyers waiting in the wings. You have to buy right now or they’ll take another offer.
That inspection takes time, they may tell you. And it won’t find anything, so why bother?
The fact is that you have to carry out a building inspection for every possible property investment. If you don’t, you leave yourself open for some major costs later on. That inspection may discover issues that the seller tried to hide. Suddenly, that golden opportunity looks like the worst investment in the world.
If the seller doesn’t allow an inspection, take your business elsewhere.
Property Investment Red Flag #7 – Huge Properties
From the outside, a huge property may seem like a desirable investment. There’s an air of luxury to larger properties. People like them, so you assume that there’ll be demand.
However, they make for bad investments if you’re not marketing towards a very specific clientele. More specifically, most people don’t have enough money to rent huge spaces.
You can’t get around that issue if you lower the rents either. The larger the property, the more you’ll spend on maintenance. More space means more things that can go wrong. Those added costs mean that you have to charge more.
Be particularly wary of large properties in otherwise normal areas. These are an even harder sell to potential tenants.
If you’re buying big, make sure there’s a market for the property.
Property Investment Red Flag #8 – A Declining Neighborhood
Again, this is where your research comes into play. A declining neighborhood contains properties that are on the decline. Yours may be one of them if you don’t pay attention to the signs.
So, what are you looking for? Economic turmoil is a major issue. If a region only has one source of industry, it’s unstable. If that industry collapses, so does the local housing market. People lose their jobs, so they can’t pay their rent. Many move away, leaving you with a property that you can’t make money from.
The state of the local infrastructure also offers some indication about the state of the neighborhood. Poorly-maintained roads suggest that the local government isn’t investing. A lack of investment also means no new infrastructure. All of this affects demand for the property.
Property Investment Red Flag #9 – A Really Low Price
You’re browsing through the property ads and a price catches your eye. The property looks the part, and you know it’s selling for less than its true value. Perhaps it’s an opportunity for you to make some money.
That’s usually not the case. A property priced well below the regional average is a red flag. There’s a reason behind that low price and the advert isn’t going to tell you what it is.
Of course, you can’t know for sure. Perhaps the seller has some motivation for selling so low, such as needing to move as quickly as possible. However, be on your guard when you check out such properties. Get both building and pest inspections. Furthermore, spend more time researching and exploring the area.
Low prices often hide major problems. These problems often cost investors their money.
Property Investment Red Flag #10 – The Local Rules
Every state has its own rules when it comes to property investment. You may not think that these rules will affect you until they’re enforced.
Take the East Coast as an example. Many states have eviction rules in place that force you to deal with lots of paperwork to evict a tenant. Even if the tenant hasn’t paid rent for months, it can still take about three months to actually evict them. Some states also demand regular inspections, which also cost you money.
These aren’t necessarily red flags that will stop you from investing. But you have to know what you’re prepared to put up with. Check the local rules before investing to ensure they won’t cause any issues.
The Final Word
Buying an investment property is not an easy task. Sellers and developers may try to pressure you into rushing your decision. You have to do extensive research and carry out inspections. All of that comes on top of the paperwork and legal issues that surround buying property.
With all of that work, it’s easy to miss some vital red flags. Look for the above when buying an investment property. Red flags don’t always mean a bad investment. However, they give you pause for thought that may reveal that the investment isn’t for you.