8 Red Flags to Look Out for When Buying an Investment Property
a8 Red Flags to Look Out for When Buying an Investment Property
Buying a new investment property is a significant decision, whether you’re a new real estate investor or an experienced one looking to add to your portfolio. Each purchase costs hundreds or millions of dollars, so it’s essential to know fundamental investment property red flags to watch out for in your search for a new buy.
Here, I break down eight common red flags for any new real estate investment property.
Undesirable Location
If a rental property is in the wrong location, such as behind railroad tracks, a fire station, or next to a gas station, you could have challenges finding and keeping tenants. Additionally, you’ll need to rent the property much lower than the competitive market rate in the neighborhood to attract tenants.
For example, if you’re looking to buy in Cambridge and Somerville, but the property is far from public transportation, you’ll have a tough time renting to commuters - a massive chunk of the tenant pool in both Somerville and Cambridge.
If the location of your property could be better, you may need to spend more time and effort advertising and showing your property to potential tenants.
Advertising an undesirable property can be challenging, and you may experience a higher turnover rate. And in the long run, this could mean more annual hours of advertising and showing the property compared to investments in better locations.
Small Bedrooms
Small bedrooms are also far from ideal for an investment property.
Many people value having enough space in their bedrooms and may be willing to compromise on other aspects of the apartment to have a large bedroom with space for a queen mattress, dresser, and desk. Bedroom size is even more critical for those working from home, who may also utilize their bedrooms as a home office.
If a bedroom can only fit a twin or full-sized bed, many renters will not consider the room a bedroom. If you were running a comparable rental analysis with the assumption that you could rent out two rooms as bedrooms, but only one room is a bedroom in the eyes of renters, you may have just reduced rent by 20-40%+ per unit! If you have a 3-family, that could result in a catastrophic loss!
As a real estate investor, you want to purchase properties that effectively sell themselves to prospective tenants. Small bedrooms will make this job much harder, resulting in more days on the market, higher turnover, and lower rents.
Poor Layout
A lousy layout is a huge red flag to look out for when buying an investment property.
A poorly designed property layout can be a significant turnoff for potential tenants. For example, a bedroom only accessible through another bedroom can be a significant drawback. Other features tenants may not enjoy include a cramped or poorly-lit living space, outdated or poorly-maintained appliances and fixtures, and insufficient storage space. These types of features can make it more challenging to attract and retain tenants.
Use common sense here - if you lived in the unit, does the flow make sense?
You shouldn't have to go through a bedroom to get to another bedroom. For another example, if a room looks like a dining room and feels like a dining room, it's a dining room, NOT a bedroom. Sure, you may be able to rent it out as a bedroom, but realistically, what would you pay for a "bedroom" like this?
A poorly designed layout can negatively impact your turnover rate. It can also lead to more wear and tear on the property due to overcrowding.
Unusable Space
Suppose a significant portion of the investment property is unusable. In that case, it may not be worth the asking price, which sellers determine by factors like square footage, condition of the property, and location.
Tenants want to feel they are getting their money's worth from each rental property. If there is a significant amount of unused space in the apartment or house, such as extra wide common hallways or large angular protrusions that are not entirely usable, it can impact what tenants will pay in rent.
If there is a significant amount of unused space in the property, it can still be counted as part of the square footage and affect the initial sales price you pay upfront, but tenants will not see that added value. So, it will increase the price YOU pay but not the price the TENANT pays.
Even if you try to redo your properties' layouts, that might cost you much more time, stress, and money than is worth your return your investment. Avoid unusable space in the first place, and you will dodge a significant stressor in your investment journey.
Busy Streets
A busy street with traffic noise and distractions can be a significant turnoff for tenants. Many people value privacy and want to sleep peacefully at night, so a property on a busy street may be challenging. In addition, obnoxious neighbors or passersby can be a deterrent. These factors can make a property less appealing to tenants.
COVID has resulted in many renters working from home, and noise levels on the street can be a significant issue for them.
While it may not be the only factor to consider when making a purchase decision, finding a rental property on a relatively quiet street is preferred. However, finding a property that meets these criteria can take time and effort, particularly in crowded metropolitan areas.
Poor Bed/Bath Ratios
Yes - there are poor bed-to-bath ratios.
Generally, an excellent rental property will have at least one bathroom for every two bedrooms.
Having just one bathroom for every three bedrooms can be a problem if multiple tenants live in the same unit and compete for bathroom space, especially if they all commute to work each morning.
Installing a new bathroom in such units is only sometimes feasible, depending on floor plans.
Looking for investment properties with good bed-to-bath ratios is a better idea.
For example, a property with two bathrooms and four bedrooms is more desirable in the eyes of most tenants than a one-bathroom/four-bedroom unit.
Shared Utilities
In addition to the above red flags, you should beware of any investment property where the utilities are not sub-metered out by the unit.
Multiple units share the electric and heating bills if they aren't sub-metered.
Suppose utilities are not sub-metered in a building in Cambridge, Somerville, or Massachusetts. In that case, the owner will be responsible for paying the utility bills for each unit and will need to include the cost of utilities in the rent.
As the owner, you have control over utility usage. Without sub-metering, it can be a problem if a tenant decides to use a lot of utilities, such as keeping the heat at a high temperature year-round. You will be responsible for the higher utility costs.
Water Damage
Beware of any properties that have water damage.
Look for water damage on the ceiling, which you can identify by freshly wet ceilings or yellow spotting on the walls. These markings could indicate that the roof, windows and/or siding has holes or cracks.
If tenants are occupying the building and water is entering their units, it may be necessary to provide temporary housing for the tenants while contractors repair the water damage, which can sometimes take several weeks. In addition, if contractors need to install a new roof, it could cost between $15,000 and $20,000+.
Tenants may experience stress due to the potential consequences of water damage: damage to personal belongings such as furniture, clothing, and electronics; disruptions to the ability to work from home if the damage occurs in a home office or other designated work area; and health concerns due to the growth of mold or other harmful substances.
So try your best to avoid purchasing properties with active water damage and always be proactive to ensure contractors seal the house well from the elements. Take early signs of water damage seriously!
Conclusion
By taking the time to thoroughly assess the condition of a property before making a purchase, you can avoid buying a "dud" or a property that will require significant repairs or maintenance, which can drain your finances and negatively impact your overall investment returns.
By avoiding these red flags, you're more likely to purchase profitable, attractive properties that will fill up with tenants sooner rather than later.
Cambridge Sage is an expert in finding attractive investment properties for tenants and can assist landlords throughout the process. With extensive knowledge of the Cambridge, Somerville, and greater Boston areas, Sage can help you strengthen your portfolio and identify properties that align with your investment goals. If you want to take your investment business to the next level, don't hesitate to contact Sage today to see how he can help.