Real Estate Investment Red Flags: What to Avoid Before You Buy
Found what looks to be the perfect property deal to start or expand your real estate empire? This is the time to stop, take a breath, and look for the warning signs that could ruin those potential dollars you’re hoping to make.
Spotting real estate investment red flags is something you’ll get better at with experience. But, with the right due diligence, even the novice investor can avoid them, or at least drastically reduce the risk of being caught out.
The Location
OK, let’s get this one out of the way to begin with. There’s a reason that real estate agents go on about this being the most important aspect of a property purchase: It’s because it matters… If you wouldn’t want to live there, then why on earth would anyone else? The best property in the world in the wrong location is never going to bring you the right return.
Warning signs include:
- Schools with constantly poor ratings.
- High or rising crime rates.
- A lack of local businesses.
- Little investment into the infrastructure.
- Poor public transport.
- A declining population.
- Lackluster job market.
An overpriced property
A house that’s significantly more than others of comparable size and location should set off your internal warning siren. Indeed, if you’re looking at a distressed property to fix & flip or BRRRR, then the cost should be well below the expected market value once it’s rehabbed.
The property or area has high vacancy rates
Because there will be a reason for this. Warning signs include an unusually high turnover of tenants or properties that remain vacant for months. You can find out this information by checking real estate rental listings and seeing how quickly properties get filled. Or a simple wander around the neighborhood will give you an idea of how many are empty.
Environmental issues
Flood risk is probably the first that springs to mind (check out the FEMA flood risk maps). But you might also want to consider issues like:
- Hazardous waste from previous industrial contamination.
- Subsidence.
- Wildfires: Climate change means that even areas that you’d never have considered at risk in the past could well be today. And don’t forget rising sea levels and weather events, such as tropical storms and hurricanes, that are increasing in frequency and intensity.
- Pollution. This includes noise as well as other airborne or waterborne pollutants.
Legal complications
Examples include missing paperwork for renovations, unpaid taxes, boundary issues/zoning conflicts, or even neighbor disputes. When purchasing any investment property, due diligence should include researching all the legal history and avoiding complications that could lead to unexpected (and potentially excessive) legal fees in the future.
Unverified rental yields
Realtors and sellers are working to a particular agenda—theirs…! Without casting aspersions, it’s not unknown for claims about rental income to be exaggerated. Avoid this by carrying out your own research as to what you can realistically expect to achieve per month.
Overdevelopment
Greedy developers have a habit of oversaturating a promising market. While expansion isn’t necessarily a property deal warning sign, too many properties will drive down expected real estate prices and rental yields.
Avoid this by:
- Researching future similar developments.
- Look at the rate of vacant properties in new complexes.
While this list is by no means exhaustive, it gives a good mix of what are potentially real estate investment red flags. However, on the flip side, some scenarios that would be a no-go for some investors would be seen by others as an opportunity.
One example might be a property that’s been poorly managed by a rental company or its owners. While issues, such as peeling paint, cracked patio paving, broken windows, a rotten porch, or similar can be a warning sign of deeper, hidden issues, if the property is in the right location and you budget for the rehab, then you could be onto a winner.
While it wouldn’t suit an investor who’s looking for a turnkey addition to a rental portfolio, it may well be exactly right for BRRRR or a fix & flip. While some red flags are automatic turn offs, others are subjective. And what they are will be driven by your own investment journey…
Whatever that might be, if you’re looking for the ultimate financing option, then be sure to check out BRRRR Loans. Discover our financing solutions for every type of real estate investor, at https://www.brrrr.com
Buy, Rehab, Rent, Refinance, & Repeat. A nationwide direct lender to real estate investors. If you have a project that needs to be funded, you’ve come to the right place.