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9 Red Flags When Shopping for an Investment Property

[Updated: Aug 06, 2020] Oct 08, 2019 by Matt Frankel, CFP
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Almost any investment property can be a good deal if the price is right.

However, there are red flags that can be good reasons to walk away from otherwise attractive investment properties. Here are nine in particular that I've come across and that you should keep on your radar as you shop for your next rental property.

1. You aren't allowed to see inside

Unless you're buying a property at an auction, it's rare that a seller won't let you see inside. However, it's not uncommon to get the runaround. Some sellers make you jump through hoops to see a property -- especially one that's tenant-occupied. In other cases, sellers might instruct their listing agents to not show a certain room.

Let me be totally clear. If you aren't allowed to go inside a property, or a part of it, you can be virtually certain that the seller is hiding something.

I recently shared one horror story that happened the first time I bought a rental property. It was a triplex and I was able to go into two of the three units. They were nice enough and the listing agent told me I couldn't enter the third unit because the tenant worked at night and slept during the day. Fair enough. I offered to come back later in the week and was told that it was off-limits during daytime hours, but was "essentially the same" as the other two.

When we closed, I discovered that it wasn't even close to the other two. The place was filthy, infested with roaches and fleas, and had an unbearable cat urine smell. In all, it needed more than $8,000 in repairs to be rentable.

The lesson: Never buy a property until you've seen 100% of it.

2. Mold and water damage

If there's any evidence of water damage, it can be a sign that major repairs are needed. In addition to obvious roof leaks, check under sinks and countertops in kitchens and bathrooms. Sellers often paint over mold or water damage to try to hide it, so be on the lookout for random fresh paint on the ceiling.

The presence of strong air fresheners or candles is another sign that something isn't quite right. In addition to mold and rotten wood, sellers could be trying to cover other unpleasant smells.

3. Bad do-it-yourself work

This is another one I wish I knew about before I bought my first rental property. It was a triplex, so it had three old-style tank water heaters. The previous owner had constructed a makeshift box around the three. It wasn't waterproof.

Within a couple of months, all three water heaters started to fail due to exposure to the elements. It cost me several thousands of dollars to not only replace them, but also to tear out the poorly built box.

4. HVAC issues

Here's one for new investors. It's not enough that a property's HVAC (heating, ventilation, and air conditioning) unit is working. If it's older or has been recently repaired, factor in the cost of repairs or a full replacement when making your offer.

5. The seller asks you to waive your right to inspect

It's fairly common for a seller to list an investment property as "as-is" or "will make no repairs," especially if it's an older property or a fixer-upper. However, it's not common for sellers to ask buyers to waive their right to inspect and back out of the deal if they don't like what they see.

The only reason I would ever waive my right to inspect is if I planned to renovate the property all the way down to the studs or tear it down. Even then, I still wouldn't consider it unless I was getting a tremendous deal.

6. Evidence of structural issues

If a property has uneven floors or you see cracks on exterior walls, it could have structural or foundational problems. These can be very costly and time-consuming to fix. I typically won't go near a property with structural problems unless I'm getting a phenomenal bargain.

7. Bad neighborhood or school district

This is perhaps my biggest red flag for a simple reason: You can change nearly everything about a property given enough time and money -- except its location. If a property is located in an area with a high crime rate or an undesirable school district, the price needs to be really enticing to get me interested.

The same can be said if a property is in a flood zone or has other location-specific problems. Your real estate agent should be able to tell you where the higher-crime areas are in your target market as well as what schools parents want their kids to go to. Zillow also has some good information, particularly on school districts.

8. Sentimental sellers

In my experience, there's little sense in negotiating with sellers who have an emotional attachment to a rental property. As an investor, it's a simple matter of dollars and cents -- if a property makes sense financially, you'll buy it. If it doesn't, you'll move on.

For example, I was looking at a package of two duplexes that the seller inherited from her late father. It was listed for $350,000. After crunching the numbers, I determined that I could pay no more than $300,000 or else the investment would have negative cash flow. I offered $275,000 to start, and the seller countered with $349,500 (what a discount!). I upped my offer to $295,000, told them that it was final, and the seller didn't budge. The listing agent informed us that the property had been on the market for six months because the seller "just knows it's worth $350,000."

This was nearly a year ago and this property is still on the market today.

These days, I try to get a feel for how attached a seller is to their property before I start the process. Usually, listing agents will tell you if there's wiggle room in the price or not.

9. Bad floor plan

Some design issues can make it difficult to rent a property out. For example, if you have a three-bedroom house but one of the bedrooms is the size of a closet, it can be a major turnoff to potential tenants expecting three full-sized rooms. Tiny kitchens or closets can be another problem. Few closets in a home can drive potential renters away.

Another example I run into often because I invest primarily in older homes is a single bathroom for three or four bedrooms, especially if it's not on the ground floor. If you've never lived in a two-story home built before the 1960s, you may not realize how common this is.

A bad floor plan isn't necessarily terrible, but it's important to realize that floor-plan issues can severely limit the property's rental income potential.

Is a red flag a deal-breaker?

Aside from not being allowed to see the inside of a property before closing and sellers who won't budge on unrealistic listing prices, none of these are automatic deal-breakers. However, you should take them into account when shopping for investment properties. Adjust your offer based on how they may affect your income.

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