If you love investing in real estate, then you know it is easy to fall in love with the wrong things. As much as we try to stay objective in our real estate investments, we can fall sway to charms—of a property, an idea, or a long-held dream. There is something about a property that just pulls you in, and you want to put in your portfolio. You have to make it yours.
Sometimes, gut instincts are right. They can lead to good decisions. They can also lead to very bad decisions! Rather than paying attention to how you feel about any given deal or property, there are objective points that can help you determine whether an investment property is poised to bring you a solid stream of passive income or not.
1. The neighborhood is good.
Remember: many of the factors that make a property a good investment have nothing to do with the property’s own merits. A good neighborhood is paramount to the success of your investment. Not only does that mean little things like good neighbors and a lack of eyesore properties, it means things like proximity to attractive amenities and places. Colleges, medical centers, areas with shopping and business: these are bonuses that can all attract a larger pool of tenants.
This is where having someone with real market insight is invaluable. They’ll have an understanding of the nuances in the market that data may not clearly reveal: like which neighborhoods are up-and-coming and which ones are on the way down. It can come down to the very street you’re on!
2. The area rental prices make sense.
At the end of the day, what you’re able to reasonably charge for rent is what will make your passive income. When you compare rental rates in your area, will you be able to fairly charge your tenants while still making enough of a profit after maintenance, management, property taxes, and other expenses? If what you’re able to charge doesn’t make sense in the scheme of things, the property may not be a fit.
3. The inspection checks out.
Always have a property inspection. Always. Even if everything looks great, sounds great, and seems great. You don’t want to risk a devastating surprise after you’ve closed the deal. When you’ve had the seal of approval from a trusted professional, you’re helping guarantee that you won’t be bamboozled by unexpected problems that can cost you thousands in repairs.
4. Minimal repairs and renovations are required.
It’s not likely that your investment property will be perfect. It doesn’t have to be! There will be renovations you’ll want and need to make to create property value and draw in tenants. That said, certain properties will demand more work than others. Many investment properties tend to be older, and that can be good and bad. Some old-fashioned architectural styles are back in vogue, charming, and even desirable—while others, not so much.
Some bad, dated aesthetics can be easily fixed: bad wallpaper, for example. Dated and garish bath fixtures? Pastel peach countertops? Those are a little harder to salvage. When an entire property is extremely, unattractively dated, it makes it more difficult to attract tenants (or future buyers).
That’s not even covering major repairs that may need to be made to bring a property up to good standards: that’s just talking about aesthetics.
When considering a property, remember: you’re not buying its potential. “Good bones” are not always enough. You’re buying it as it is. You have to weigh whether or not the cost will be worth it.
Keep These Red Flags In Mind:
- The numbers don’t add up.
Don’t try to fit a square peg in a round hole. If the numbers don’t make sense, they don’t make sense. Run real numbers, using your real experience, and let them speak to you.
- Solid facts are elusive.
Does the seller dodge questions about the area or the property? They may not really be hiding anything from you, but always check to be sure.
- Looks good on paper, not so much in person.
Even if you don’t see the property yourself, make sure someone you trust does. What looks good in pictures or on paper can tell a different story in person.
- It’s a real fixer-upper.
Unless you’re a fix-and-flip investor, a massive overhaul is not likely the kind of investment you want to pursue. Skip these if you’re looking for buy-and-hold rental properties. Snapping up those cheap properties might seem like a good idea, but they can be a big headache.
- The area is in decline.
Pay attention to your property’s surroundings. What are the conditions of the schools? How are crime rates? Which areas are being revitalized? Which ones are declining? Mind these trends. They will impact you: not only for your future properties, but for ones you already own.
Chris Clothier, author of The Turnkey Revolution, manages the development and implementation of sales and marketing for Memphis Invest. He helps potential investors define their purpose for investing in real estate and educates peer companies on best practices in the emerging turnkey real estate industry. He is a contributing columnist for BiggerPockets and an experienced speaker who regularly addresses audiences of real estate investors and business professionals.
