Know the Warning Signs! How to Spot Bad Investment Properties
May 28, 2023
According to some research, 31% of Americans think that real estate investment is the best way to spend their money.
If you're thinking of getting your own investment properties to grow your portfolio and make some passive income, you're definitely not alone.
But what should you do to ensure that you make the best investment possible? There are some red flags that you should avoid when you invest in real estate.
Keep reading to discover some warning signs of a bad investment property.
No Interest From Buyers
Has the investment property been on the market for a long time? This might be a sign that there is something wrong with it. There has to be some reason that buyers are avoiding it.
However, it could also still be possible that many buyers may not even know about that. But you may also want to ask why the property has sat on the market for an extended period of time.
Many factors could make the house sit on the market, but there could also be one big problem that would make the investment unprofitable.
Bad Location
You also need to make sure that the property is in a profitable location. You'll need to look at the future value of the neighborhood and the city that the property is in.
If you're in the area, visit the house and drive around the area. Are other houses falling apart or looking abandoned? Are you buying a rental property with enough amenities to ensure that renters will want to rent there?
You'll also want to see if the schools in the area are good so that you can attract families. Is there also a low crime rate, and is it safe to live at?
Are there things to do around, like parks, shopping, and family-friendly venues? The property can look great but be in a terrible neighborhood.
Pests
Are there any pest problems in the area that could be affecting the property? For example, in Miami, many homes have termite problems, so you should have someone inspect the house before you buy it.
However, there could be hidden pests in the walls of the home, and you want to have a third-party investigate the home before you buy it.
Short Investment Memos
When you're learning about real estate investing, you'll also have to consider short investment memos. It's easy to think about the investment costs upfront, but you'll also want to consider the hidden costs.
For example, is there local demand for different types of properties? This could mean that the property is a little bit more inflated than other properties in areas that don't have a high local demand.
You'll also want to consider how much renovations will cost when buying the home. All of these hidden costs should be detailed in an investment memo.
However, many sellers will try to hide these important investment details, so you may have to do some research on your own to fully understand all the costs.
Low Asking Price
Does the property have a lower asking price than the other properties in the area? This could mean that it's too good to be true.
Sellers might offer a lower price if there's something wrong with the property. For example, there could be something structurally wrong with it that might not be obvious to buyers.
If you find a property that looks great but is undervalued, ensure that you have a third party inspect it first. This way, you can make an accurate decision based on all of the qualities of the home.
The Property's Been on the Market Too Long
One of the biggest real estate investing mistakes is investing in a property that has been on the market for too long. The amount of time for a house to be on the market depends on what type of market it's in.
If it's a seller's market, you should avoid a house that's been on the market for a few months, especially if houses are selling in a day. In a buyer's market, you'll want to question any homes that have been on the market for more than six months or a year.
However, there are many other factors that will determine why a property has sat on the market. For example, if the property is expensive, many people might just wait for the price to drop.
However, if the price seems appealing and hasn't sold, the house might be wrong. Before you buy a home that's been on the market for too long, do your research and trust your instincts.
Numbers Don't Add Up
For each investment property, you'll also want to consider the numbers for the house. For example, is the listing price similar to other properties that have sold in the area?
The most important aspect is determining if you can profit from investing. You'll need to calculate your return on investment (ROI) and see if the property will be cash-flow positive.
You'll also want to consider if the property has a good loan to value. This will ensure that your loan isn't too much compared to the property. If any of these numbers don't add up, this might be a sign that the property isn't for you. If you aren't sure if the numbers are correct, contact an accountant.
Seller Is Holding Back
Do you feel like the seller isn't telling you everything about the transaction? This could be a sign that they're hiding something important about the house.
Every buyer should have an inspector that works with them and looks over the home before anyone signs. This process could find something problematic, like broken appliances, bad roofing, or faulty electrical wiring.
If you find any of that in the inspection, the buyer will have to fix the problems, pay before you make a deal, or lower the price. Because of this, the seller might try and prevent an inspector from looking at the house. They might also hide information from you.
Any seller who acts this way is hiding something, and you should walk away before you make a bad investment.
Have a Bad Gut Feeling
Do you have a bad gut feeling about the investment? If you're an experienced real estate investor, you'll definitely know when something is off. If you feel like something is wrong but aren't sure what, investigate to see if there are any other red flags you notice.
While you should try and keep your emotions in check, trusting your instincts is important. When you have all the facts in front of you, figure out why you might feel uneasy.
Listen to that feeling; otherwise, you could regret the investment later on down the road. You should also make sure that you know what your instincts are compared to anxiety about making a big purchase.
There's nothing wrong with taking a step back and seeing if there is actually something wrong with the investment. It never hurts to double-check that everything is in order. Don't invest a large amount of money in something that you don't believe in.
Buying in a Town With One Industry
Because location is one of the most important factors when buying a house, make sure that there are multiple job industries in the city you're buying in. Because most properties are long-term investments, you'll need to ensure you buy in a town that keeps attracting people.
For example, buying in a town that only focuses on the tech industry is riskier than buying in a city that focuses on tech, healthcare, and defense. If the house is in a one-industry town, it carries more risk than in a diversified town.
If you're a passive investor without industry experience, you may want to consider buying a house near a large city. Normally, there is less risk and more industries that will survive any sudden changes in the market or economy.
If you have experienced knowledge of one area, you can take advantage of that and buy in an area most investors might not be looking at.
The Seller Is Questionable
You may want to research their credibility if you don't know the seller or have never met them. Do they have a reputation for being honest and transparent?
When you're investing in real estate, it can help to understand who is selling the house. If there are any signs that they have sold sketchy properties in the past, this is a red flag.
You should also take notes if there are any signs that they are being dishonest. Do they seem knowledgeable about the property, or do they ignore all of your questions?
Do they give you numbers that don't make sense? Are they trying to rush you into buying the property? A seller should be open to answering any questions in an attempt to sell the house successfully. If they're trying to rush you into buying the home, there may be something wrong with it, and they want to get rid of it as soon as possible.
Missing Details
When you look at the listing, make sure there are as many details as possible listed. You'll want to see if the square footage calculations are listed and make sense.
Is there a missing bedroom from the listing? There might be a bedroom that is in there but not up to code.
You should also have information on when the house was built if there are any extra fees, and if the property was surveyed. If there are details missing, this might mean that the property isn't a good investment.
Signs of Water Damage
When you tour the house, look around for wet areas that could indicate there is water damage. Some sellers will try to paint over it in an attempt to hide it, but you still might be able to notice.
The water damage could also be a red flag that there is a great environment for mold to grow as well. Make sure that you look in common areas for water damage, like underneath drawers, sinks, and the walls around toilets, sinks, and showers.
Mold can also grow underneath windows if there is a leak. Check underneath the window sill. If you see that the sheetrock is soft or warped, there are leaks coming through the windows.
A seller might try to paint over the window sill to mask this, but this is a sign that you need to look for a new investment property.
Discover More About How to Spot Bad Investment Properties
These are only a few signs of how to spot bad investment properties, but there are many other factors to consider.
We know that becoming a good real estate investor can be overwhelming at first, which is why we have a course that can teach you more about making successful real estate investments. Click here to learn more about our Real Estate Investing Course for Beginners.