An investment property, or property purchased for the purpose of flipping or holding and renting, can be a lucrative asset in the best case scenario. In the worst case, they can be financial drains that result in a negative cash flow. When considering potential investment properties, there are countless variables to take into account to determine whether or not it is a smart investment. Many of these variables will be personalized, like what your expected time frame is for a return or whether you will be selling or renting the property. In addition, there are also red flags to watch out for. Not all red flags are deal breakers. However a smart investor should be aware of all red flags and the potential risks they pose before purchasing a property. Read on for a list of 6 red flags to take note of when purchasing an investment property.
Red flag #1: You can’t view or tour the entire property, or the seller asks you to waive your right to inspect.
- This is a HUGE red flag for obvious reasons. Any request for you to waive your right to inspect or strong resistance to showing you the entire property indicates that the seller is trying to hide something. Reluctance to show the entire property on the part of the seller is not uncommon, especially if there is a room needing more rehabilitation than the rest of the house as sellers know this might threaten a potential sale. However, an outright refusal to show you everything should be regarded with skepticism. It should go without saying, but don’t ever buy a property you haven’t seen. Even if you plan to demolish the structure and rebuild, it is still advantageous to look at all parts of a property first. Maybe there is a room that is infested or storing hazardous material you can’t just take to the dump. This could result in additional costs for repairs or rehabs that need to be accounted for in order to determine if the investment property will be profitable for you.
Red flag #2: Random fresh paint in odd places.
- It is common for homeowners to spruce up a property in preparation of selling, including painting the interior and/or exterior. However, take notice of any spots of fresh paint in odd places like the ceiling or under sinks. This could be a sign that there is mold or water damage that the seller was attempting to hide
Red flag #3: An older HVAC, even if it was recently repaired.
- HVAC (heating, ventilation and air conditioning) units are almost a necessity in today’s rental market. If you are purchasing a property that has an older HVAC you would be wise to factor in the cost of replacing the system. At the very least, even if you don’t replace the unit, you will likely have to perform ongoing repairs for older units which you should likewise factor into the cost of purchasing.
Red flag #4: Structural issues
- If you are looking for an investment property to rehab or revamp, pay close attention to any signs of structural damage. These include uneven floors, cracks in basement or exterior walls and sticking windows or doors. These are just a few signs of structural damage, but there are lots of others. This is why you would be wise to bring a professional knowledgeable about these matters with you when evaluating a potential investment property. Structural issues may not be as concerning if you are planning to demolish and rebuild, but even then you still want to be aware of structural damage because it could indicate foundational issues you will need to take into account when rebuilding.
Red flag #5: Flood zones, high crime rates, bad school districts
- Many investors argue that these factors are the only red flags that are deal breakers. This is because you might be able to remedy an infested room or an ancient HVAC system, but no amount of time or money can change the crime rates or school districts. While neighborhoods often change over time with influences like gentrification, this isn’t something you can count on so it’s best to assume the neighborhood and school districts will remain the same for the foreseeable future. This also applies to property built in flood zones. These can drastically influence the selling or rental price so you should always be aware of the property’s surroundings as well.
Red flag #6: Huge units or huge lots
- Huge units or huge lots are harder to rent out. While not always the case, huge units and/or huge lots typically require more maintenance than smaller units and lots. In addition, people looking for houses on 3,500 sq ft lots are typically going to be looking to buy not rent. If you are planning to purchase an huge investment property to rent out, be sure to have a solid game plan for how you will market the property and factor that marketing budget into the costs of purchasing.
Investment properties offer great potential for growing wealth. At the same time, they offer great potential for depleting wealth if they turn into financial black holes. Be sure to take your time exploring every nook and cranny of an investment property and factor any red flags into the overall cost and risk analysis before purchasing any property.
