This blog post explains rental property red flags you should never ignore. Read how to recognize and avoid these red flags to make your rental investments profit.
Never Ignore These Rental Property Red Flags
The following six rental property red flags shouldn’t be ignored. Avoid them to earn greater profits with your rental properties.
Rental Property Red Flag #1 – Not Every Cheap House Is a Good Rental Investment
Just because a seller advertises a house for cheap doesn’t mean it’s a good rental investment. A fix and flip investment property rarely function as a rental.
Beware of “As Is” or “Needs a Little Fixing Up” or “Cosmetic Makeover Required” advertisements. After all, you are not a plastic surgeon. If you want to become a Fix & Flip investor read this post: “How to Flip a House for Beginners” Otherwise, don’t waste your time.
Massive overhauls of houses cost too much time and money. Never a good investment for investors looking to buy and hold rental properties.
Rental Property Red Flag #2 – The Numbers Don’t Add Up
You must run the numbers on every potential investment. Do this before committing the time and expense to make an offer and perform due diligence.
Don’t rely on a seller’s charts and spreadsheets showing big profits. You must do your homework and come up with your own numbers. If the numbers don’t make sense, it will never work.
Here is a good resource to come up with the right numbers to help you determine if the property is a good rental investment: “How to Run the Numbers for Rental Properties”. You will learn about the following rental income analysis tools:
- Gross Rent Multiplier (GRM) which is the gross rent before subtracting expenses;
- Cap Rate shows how well a rental makes income after expenses;
- The 1% Rule saying the gross rent should equal at least 1% of the purchase costs;
- The 50% Rule estimates the Net Operating Income used on 50% of the Gross Rent;
- Pre-Tax Net Income After Financing Costs;
- Cash-on-Cash Return calculates how much of your down payment comes back to you as cash per year; and
- Calculating Equity shows the difference between your property’s fair market value and your debt (liability).
These seven analyses help investors decide whether to buy a rental property.
To learn more about some of these formulas read our prior posts like:
- How to Make Millions with Rental Properties includes links to real estate investment calculators;
- How to Understand CAP and ROI Rates; or
- Forbes, “Property Rental Valuation Metrics”.
Rental Property Red Flag #3 – Elusive Sellers Have Nothing Worthwhile to Sell
Just like sleazy used car salespersons beware of property sellers dodging questions about lot size, boundary lines, zoning restrictions, and square footage.
You need to do business with people you like and trust. Even if the seller appears to answer your questions truthfully, as the old saying goes: “Buyer Beware”. That’s why Due Diligence exists to protect buyers.
Written contracts to purchase real estate must always have contingencies and a sufficient due diligence period to conduct thorough property research. Read this post explaining “Contingencies” titled: “What are Real Estate Contingencies in California?”.
Rental Property Red Flag #4 – Declining Areas Make Poor Investments
Look around the property’s surroundings. Do the streets and sidewalks need repairs? Do the neighbors’ homes look like they need repairs? Are their yards filled with junk? Do all their windows contain steel bars?
Research the local crime rates. What are the ratings and conditions of the nearby schools? Which areas are declining? Which ones are revitalizing? Pay attention to these trends. Avoid the “Proverbial War Zones”.
Analyze the crime rate risks. Bigger Pockets published a useful article about Analyzing Crime Risks. It gives you tips for finding neighborhood crime statistics and how to get information about the types of crimes.
Buying a rental house in a high crime rate area puts your tenants and your investment at risk. The cost of break-ins and thefts can wear out your insurance coverage fast. Add the costs for replacing stolen A/C condensers, appliances, and furniture included in the rental. Don’t forget the time it takes to find and buy replacements.
Here are websites providing good resources about crime rates for every zip code in the country:
However, these four sites only offer crime rates by zip code along with information about per capita income, median prices, and vacancy rates.
Some crime mapping websites show maps with reported crimes dotted in. Too many dots mean high crime areas:
Do a Drive-By to See a Neighborhood’s Condition
Things you need to look for during the day are:
- Boarded up, vacant buildings;
- Cages around A/C condensers;
- Dilapidated or burnt-out buildings unrepaired;
- Bars on doors and windows;
- Lots of graffiti; and
- Trash on the streets.
Tip: Visit a local convenience store or two to see if the cashier is safely behind Plexiglass.
Finally, do a drive-by at night. If you feel unsafe your instincts are probably correct. If a neighborhood looks dilapidated, smells bad, or troublemakers loiter around step on the gas and get out of there.
Visit the nearest police station and ask about the safety of the street or neighborhood you are thinking of living in. Most maintain a record of the calls made to them about crimes in those areas.
Rental Property Red Flag #5 – Bad Schools Scare Away Good Families
Let’s face it, professional, educated families seek the best schools for their kids. Declining areas and war zones don’t offer good schools.
If you want tenants with good incomes, know they want a proper education for their children. The quality of the local school district is a deal maker or a deal breaker with most families.
- Academic Progress;
- College Readiness;
- Equity; and
- Test Scores.
They also include open-ended reviews from parents providing insightful comments and thoughts.
Rental Property Red Flag #6 – Size Counts
Houses too large do not make good rentals. High maintenance costs scare families on tight budgets. They are better suited for buyers than renters.
Too few bedrooms and bathrooms also scare away couples seeking to start a family or a family looking to expand. As children grow older, they demand privacy and their own bedrooms and bathrooms.
While you can always add bedrooms and bathrooms you must consider the costs and if the increased rental price justifies the capital expenditures. It’s back to the numbers, do they justify the expense?
The same goes for small kitchens and bedrooms. Removing a wall may fix the tiny kitchen or bedroom problem, but do the numbers justify the expense?
The master bedroom needs to be larger than the others. A small third bedroom can always become an office or a nursery. As long as the other bedrooms are sufficiently sized (like a 10 foot by 10 foot).
Tip – Educate Yourself About Rental Property Investments.
WeLease publishes many blog posts educating our readers about rental property investments. Each post only takes a few minutes to read and learn how to profit with rental investments like:
- How to Invest in Rental Property with Little Money;
- Property Tips for Rental Owners;
- Rental Investors Share Secrets;
- Why Real Estate Rental Investors Fail;
- Landlord Mistakes Limit Profits;
- Should You Invest in Older or Newer Rentals?;
- How to Avoid Your First Real Estate Investment Mistakes; and
- How To Get Better Real Estate Deals (Tips from the Pros).
Rental Property Red Flags You Should Never Ignore – Conclusion
Now that you read about rental property red flags you should never ignore, make sure you follow them. Such as:
- Cheap houses don’t always mean a good rental investment;
- Your numbers must add up;
- Avoid elusive sellers;
- Avoid declining locations;
- Good families avoid bad schools; and
- Too large houses and few bedrooms and bathrooms make bad rentals for families.
Need Help Recognizing Rental Property Red Flags?
Build A Winning Team – You should always create a team of real estate professionals to help guide you with finding good rental properties to buy and to profit from them. This includes an experienced Realtor, a real estate attorney, an accountant, and a property management company. Together, this team will make you a winner with rental investments.
After purchasing, you may need the services of an experienced property management company in the greater San Diego area like WeLease.
Contact us for all your property management needs in San Diego County.
Steven Rich, MBA – Guest Blogger
HAVE ANY QUESTIONS?
Let us know, we’d love to help:
Call: (619) 618-9115
or Click: www.WeLeaseUsa.com/contact
WeLease Property Management Company