Investing in real estate can be a life changing endeavor, but it is important to understand what you are getting yourself into and when to walk away from a deal. If it seems too good to be true, it probably is. Here are five red flags to look out for so you know when to walk away.
Above Your Budget
Real estate investing is serious business, so you have to treat it like a business. Know your budget so you understand what you can afford going into your real estate search. Stick to that budget, even if something great comes along.
Imagine you do make a purchase over your budget then an unexpected repair or legal issue arises. Would you have the resources to respond appropriately? If the answer is no, it is time to walk away.
Too Many Maintenance Issues
If you find a property is great but… it has a ton of maintenance issues, do a very detailed inspection and list out which issues are urgent, which can wait for later, and then look at what everything would cost to resolve. If the urgent repairs would take you outside of your budget, like in the example above, it is time to walk away.
Some investors make an entire career on fixing up properties, but unless that is in your area of expertise and you are comfortable moving forward, follow your gut and look for a different property.
Poor Quality Tenant Pool
A great property in a bad area is no longer a great property in some cases. Look at the local area and tenant pool. Is the area up-and-coming with increasing rents, or economically depressed?
The economic conditions around the property influence people’s ability to pay. Also look into whether there have been police complaints and crimes at and around the property to know what you are getting yourself into.
Negative Cash Flow
Sometimes bad cash flow is a great opportunity to buy a property at a discount. Other times, it is a signal of something fundamentally wrong with the tenants, property managers, or the building itself.
Carefully examine the rent roll to see if clients are renewing, paying on time, and how long units sit empty. If you can explain a problem or identify a clear strategy to fix it, walk away and find something else to buy.
High Vacancies and Turnover
Speaking of vacancies and turnover, those can be a problem on their own even on a property generating positive cash flow. This could be related to the local area and tenant pool, or there could be something else going on.
Again, look at the rent roll, talk to the property manager or existing owner to see if you can find any clear issues. If you don’t see any problems and can’t explain why units are sitting empty and turning over quickly, it is a sign of a bigger problem, and a sign that you may be best off walking away.
Find the Right Agent for Investment Properties
Some real estate agents specialize in single family houses, others specialize in condos, others on investment properties, such as a certified Real Estate Investment Advisor.
Whatever your needs, find the right agent to help you meet your goals. If you don’t have an agent, start your search at AgentHarvest, where our pre-vetted and qualified agents are ready to get to work for you.