There are some dreaded scenarios for long-term buy and hold real estate investors out there, and most revolve around the dumb things tenants can do in and to a property. One thing that most new investors can easily overlook is crime. Some of the stupid criminal enterprises that can be set up in rental properties will amaze you, from low-level drug dealers to sophisticated chop shops.
I should know. I've seen my fair share of criminal activity after managing 2,500 properties. I've come to the conclusion that, unfortunately, crime is a reality that is sometimes out of your control.
No investor or property is truly immune from the possibilities of illegal activity. The best that real estate investors can do is to mitigate the chances of crime on their properties as much as possible. The last thing you want is to find out too late that crime occurred on your property. That usually involves legal notices and questions about your own awareness of the criminal activity and, in some cases, can lead to properties being placed under lock and key until an investigation is complete. That can take a long time! So what can you do to ensure that rental investment property stays on the up and up?
Watch the neighborhoods you're buying in
This is the easiest piece of information to misunderstand, and I'll share an anecdote shortly proving that point. You're not able to pinpoint where drug or criminal activity will take place, and you can't point to a neighborhood and say that something will or will not happen.
But there are neighborhoods where past activity has occurred. There are neighborhoods cut off from transportation routes and businesses. And yes, these tend to be lower-income and economically challenged areas of town, where statistics will show there's a greater propensity for this kind of activity.
If you want to avoid having to deal with the local D.A., and having to evict immediately because your tenant is behind bars, then factor the neighborhood and your lack of desire to deal with those issues in your decision making. Smart investors assesses ALL the risks before they purchase -- not just the surface risks, like tenants and toilets! While no neighborhood is immune to illegal activity in rental homes, some are more susceptible than others.
Make sure your property management is paying attention
Unless you've taken on the day-to-day landlord responsibilities yourself, you may not be close enough to your investment properties to identify suspicious activity. Whoever manages your investment property, whether it's a single person or a team, needs to be diligent in looking for the warning signs of crime on the property. The best you can do is make clear what they should be on the lookout for.
While you don't want to be overly paranoid, being observant and aware of anything out of the ordinary or suspicious, particularly over time, will help spot warning signs. Make sure your property manager knows how to safely handle the problem; should one arise never let a manager confront suspected criminals alone. Create a plan to take note of suspicious activity and call the authorities to take it from there.
How to spot a drug deal
Some drug deals are more overt than others. In many cases, however, there's a pattern that develops when deals are taking place on your property. Note that many drug dealers try to find neighborhoods, or apartment complexes, in which neighbors are isolated or don't communicate with one another.
As a real estate investor, I'm not looking for neighborhoods that fit that pattern. Some investors reading this article may find that these types of neighborhoods are perfect for them based on any number of factors including location, proximity, and price point.
Regardless, I have had a personal experience with a property located in a very nice neighborhood that did not fit any criteria that are identified as "prime target" neighborhoods for drug trafficking, and yet drug activity occurred at my property.
With that in mind, understand that it can happen anywhere, and you need to be aware as a real estate investor.
These warning signs from Nicoma Park Police department are an excellent reference for things to watch at your investment property.
Excessive traffic to and from the property.
Loitering in or around the property.
Frequent, unusual traffic patterns. Stop, enter, leave. Drug deals are often quick.
Frequent traffic stops outside the property, especially if the resident goes out and speaks to the people in the car.
Gang activity in the neighborhood.
Sudden increase in criminal activity.
These aren't all the signs, but a few tell-tale red flags that should prompt suspicion. It may benefit you to get involved with Neighborhood Watch (or start one) if it seems as though there are suspicious activities happening. It will also definitely help to knock on the doors of houses surrounding your house, and encourage them to call you if there are issues. The same goes for your management company. They may not be able to do it, or they may not want to do it, but if you feel there is a problem, and you employ a management company, ask for them to get involved and keep an eye on the neighborhood.
What about methamphetamine?
You obviously don't want your tenants to pull a Walter White in your investment property. Meth is not only illegal, but its preparation has a significant chance or fire and explosion, and the toxic residue is impossible to get rid of. Rental properties are often at a greater risk for being used as meth labs.
Remember, too, that insurance rarely covers this type of damage, which can add up to tens of thousands of dollars out of your pocket.
Even if you manage to get the property back into a presentable condition, you'll have to disclose the environmental hazard present.
Ideally, you and your property management will be able to identify this illegal activity before it starts. How?
First, know the ingredients needed to cook meth:
Ephedrine or pseudo-ephedrine (in allergy, cold or diet medicines) in large quantities
Lye, or as it's also known, sodium hydroxide
Anhydrous ammonia (usually in coolers)
Large amounts of iodine
Red phosphorus (large quantities of matches)
Any combination of these, particularly in large quantities, should raise a red flag. What else should you look for?
A neighbor reporting shady activity. This is why it's a good idea to get to know the neighbors -- they can keep an eye out for you. They may smell something funny -- the ammonia, ether, lighter fluid or sulphur in most cases -- or notice that your tenants are taking their trash somewhere other than their trash can.
Blocked or boarded up windows.
Odd patches of dead grass where toxic byproducts may have been dumped.
Behavior similar to that of the drug deals listed above.
Sheets or other fabric discarded and covered in a white powder.
Rent suddenly being paid for in cash.
Again, if you suspect a meth lab or any other criminal activity, do not let your property management confront the situation alone. Call the police. If you are a landlord, the same goes for you. Get the authorities involved as soon as possible.
How do I prevent it from happening?
Remember, be on alert for signs of criminal activity. You should also check in with your property management company, and make sure they are continuing to monitor your property on a routine basis.
It helps tremendously when a management company is managing more than one property in close proximity. It allows them to be in the neighborhoods and on the lookout. Try to get to know your neighbors, and make communication a regular part of your relationship.
This is your investment property, but in the case of your tenant and your neighbors, it is their neighborhood. Most will want to make sure they are safe and free from crime.
Perform thorough tenant screening
Don't get bamboozled by bad tenants. Always perform thorough tenant screening, including verifying their source of income, and contacting previous landlords and references.
Listen to your intuition -- if something doesn't feel right, it's probably for good reason. Be clear, and check local and state laws before setting policies such as a no rental policy to convicted felons; but it may be wise if it is legal to have a policy that convicted drug dealers are a no-go.
I know that sounds like a no-brainer, but you should not be shocked to hear that MANY landlords and management companies fail to do proper background checks, and are easily talked into renting to the wrong people when they do a background check. This is the last line of defense, so be diligent!
Include regular inspections in your lease agreement
It's a lot harder to run illegal activities when you have inspections on a regular basis. Remember that there are legal guidelines for giving tenants notice for visits, so be sure to heed them.
While a drug deal can be hidden more easily than a meth lab, regular inspections can deter criminal activity from starting up. Inform your tenants upon move-in that there will be regularly scheduled inspections, and that they will be given proper notice. A little deterrent goes a long way!
This article originally appeared on BiggerPockets.com, and is Copyright 2014 BiggerPockets.
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