6 Red Flags With Any Rental Property Purchase
Posted by JD Esajian // December 9, 2017
A quality rental property can completely transform your portfolio. The idea of having tenants provide you with monthly cash flow while reducing your loan balance is a very appealing thought. However, not every property makes a good rental. It is important to always do your due diligence on every prospective rental purchase you make. There are times you will come across items that are not only costly but make it difficult to find good tenants and maximize cash flow. These red flag items are often non-negotiable deal breakers and must be taken seriously. Here are six red flag items to look out for on any prospective rental property purchase.
- Location. As basic as it sounds the idea of rental property ownership is to attract tenants. The best way of doing this is to own a property in an area of high demand. Getting a property at a discount may sound like a good idea, but when it is time to find a tenant you may be disappointed in the results. It is always smart sticking to growing markets in developing areas. Rural properties require a unique tenant that may not be willing to pay market price. With reduced demand you may be forced to lower your price just to avoid a vacancy. You also need to consider managing a property that is slightly off the grid. The farther your rental is from where you live or work the more potential issues that are presented.
- Poor demographics. When buying a rental property you should take the same mentality as if you plan on living there. If there is something unappealing to you, tenants will find it unappealing as well. With any purchase you should always look at the demographics of the area. Things you may not think matter too much to tenants such as schools, crime, unemployment and even taxes can sway a tenant away from your property. If the area is in decline tenants will go to where jobs are and where they feel comfortable living. Poor demographics often lead to poor rental properties.
- Irregular sizing. You never want your rental to be too big or too small for your market. A 2500 square foot house with all the amenities you desire can be a great house to live in, but can make for a difficult rental. Tenants don’t want to furnish such a large home if they are only going to be there for twelve months, or less. Even if they do furnish it they may not be willing to pay top dollar for rent when there are a growing number of loan programs becoming available. You want to find rentals that are average size and price for the market. It is ok for your rental to look like every other property.
- Wetlands/environmental issues. Every purchase, investment or otherwise, carries some form of risk. The key is to look for properties with as minimal amount of risk as possible. A giant red flag for any property are issues associated with environmental, wetlands or flooding concerns. You can fix anything cosmetic, even structural problems can be resolved, but problems with wetlands should be a deal breaker. Not only are you forced to go back and forth with the town, but these are expensive resolutions. Additionally, you never know when another problem will pop up out of nowhere. A minor rainfall can prompt a flood and open the door for other issues you never would have anticipated.
- Storage. You can have the nicest property but without ample storage tenants may look elsewhere. Regardless of the size or layout of the property closet space and excess storage opportunities are essential. Tenants need to be able to comfortably live in the property. Nobody wants to have their items compressed in one room or thrown in a small closet. You don’t need to have a walk-in closet in every room, but you should have an attic or space in the basement for tenants to put extra items. This may call for you to get creative with the rehab but whatever additions to storage you can make will impact the demand for the property.
- Yard. Depending on where the property is located lack of a yard can be a real deal-breaker. Markets where properties are in close proximity to each other it is almost understood that there will not be much privacy. However, in average markets you need to look at the yard before making a purchase. Nobody wants to live in a property where the neighbors are on top of them. Every time they leave the house there is somebody on either side, watching their every move. You don’t need to have an acre of land, but you should note how close the neighbors are.
All rental properties are not created equally. In areas of high demand, it is the little things that can directly impact just how rentable your property is. The more demand for your property, the more you can charge for rent, and the higher your cash flow will be. If there is any doubt as to whether something will impact the property it is always best to err on the side of caution. If you think something may be a red flag, it usually is.