• by The VRET Team

Know the Warning Signs! How to Spot Bad Investment Properties

According to some research, 31% of Americans think that real estate investment is the best way to spend their money.

If you’re thinking of getting your own investment properties to grow your portfolio and make some passive income, you’re definitely not alone. 

But what should you do to ensure that you make the best investment possible? There are some red flags that you should avoid when you invest in real estate.

Keep reading to discover some warning signs of a bad investment property. 

No Interest From Buyers

Has the investment property been on the market for a long time? This might be a sign that there is something wrong with it. There has to be some reason that buyers are avoiding it. 

However, it could also still be possible that many buyers may not even know about that. But you may also want to ask why the property has sat on the market for an extended period of time.

There could be many factors making the house sit on the market, but there could also be one big problem that would make the investment unprofitable. 

Bad Location

You also need to make sure that the property is in a profitable location. You’ll need to look at the future value of the neighborhood and the city that the property is in.

If you’re in the area, visit the house and drive around the area. Are other houses falling apart or look abandoned? Are you buying a rental property that has enough amenities to make sure that renters will want to rent there?

You’ll also want to see if the schools in the area are good so that you can attract families. Is there also a low crime rate and safe to live at?

Are there things to do around, like parks, shopping, and family-friendly venues? The property can look great but be in a terrible neighborhood. 

Pests

Are there any pest problems in the area that could be affecting the property? For example, in Miami a lot of the homes have termite problems, so you should have someone inspect the house before you buy it. 

However, there could be hidden pests in the walls of the home, and you want to have a third-party investigate the home before you buy it. 

Short Investment Memos

When you’re learning about real estate investing, you’ll also have to consider short investment memos. It’s easy to think about the investment costs upfront, but you’ll want to consider the hidden costs as well.

For example, is there local demand for different types of properties? This could mean that the property is a little bit more inflated than other properties in areas that don’t have a high local demand. 

You’ll also want to consider how much any renovations will cost when you buy the home. All of these hidden costs should be detailed in an investment memo.

However, many sellers will try to hide these important investment details, so you may have to do some research on your own to fully understand all of the costs. 

Low Asking Price

Does the property have a lower asking price than the other properties in the area? This could mean that it’s too good to be true. 

Sellers might offer a lower price if there’s something wrong with the property. For example, there could be something structurally wrong with it that might not be obvious to buyers. 

If you do find a property that looks great but is undervalued, make sure that you have a third-party inspect it first. This way, you can make an accurate decision based on all of the qualities of the home. 

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The Property’s Been on the Market Too Long

One of the biggest real estate investing mistakes is investing in a property that has been on the market for too long. The amount of time for a house to be on the market depends on what type of market it’s in.

If it’s a seller’s market, you should avoid a house that’s been on the market for a few months, especially if houses are selling in a day. In a buyer’s market, you’ll want to question any homes that have been on the market for more than six months or a year. 

However, there are many other factors that will determine why a property has sat on the market. For example, if the property is expensive, then many people might just be waiting for the price to drop.

However, if the price seems appealing and hasn’t sold, there might be something wrong with the house. Before you buy a home that’s been on the market for too long, do your research and trust your instincts. 

Numbers Don’t Add Up

For each investment property, you’ll also want to consider the numbers for the house. For example, is the listing price similar to other properties that have sold in the area? 

The most important aspect is figuring out if you can make a profit from investing. You’ll need to calculate your return on investment (ROI) and see if the property will be cash-flow positive. 

You’ll also want to consider if the property has a good loan to value. This will ensure that your loan isn’t too much compared to the property. If any of these numbers don’t add up, this might be a sign that the property isn’t for you. If you aren’t sure if the numbers are correct, contact an accountant. 

Seller Is Holding Back

Do you feel like the seller isn’t telling you everything about the transaction? This could be a sign that they’re hiding something important about the house. 

Every buyer should have an inspector that works with them and looks over the home before anyone signs. This process could find something problematic, like broken appliances, bad roofing, or faulty electrical wiring. 

If you find any of that in the inspection, the buyer will have to fix the problems, pay before you make a deal, or lower the price. Because of this, the seller might try and prevent an inspector from looking at the house. They might also hide information from you.

Any seller who acts in this way is definitely hiding something, and you should walk away before you make a bad investment. 

Have a Bad Gut Feeling

Do you have a bad gut feeling about the investment? If you’re an experienced real estate investor, you’ll definitely know when something is off. If you feel like something is wrong but aren’t sure what, do some investigating to see if there are any other red flags that you notice. 

While you should try and keep your emotions in check, trusting your instincts is important. When you have all of the facts in front of you, figure out why you might be feeling uneasy. 

Listen to your feeling, otherwise, you could regret the investment later on down the road. You should also make sure that you know what your instincts are compared to anxiety about making a big purchase.

There’s nothing wrong with taking a step back and seeing if there is actually something wrong with the investment. It never hurts to double-check that everything is in order. Don’t invest a large amount of money in something that you don’t believe in. 

Buying in a Town With One Industry

Because the location is one of the most important factors when buying a house, make sure that there are multiple job industries in the city you’re buying in. Because most properties are long-term investments, you’ll need to ensure that you buy in a town that will keep attracting people. 

For example, if you buy in a town that only focuses on the tech industry, this is riskier than buying in a city that focuses on tech, healthcare, and defense. If the house is in a one-industry town, it carries more risk than in a diversified town. 

If you’re a passive investor and don’t have experience in the industry, you may want to consider buying a house near a large city. Normally, there is less risk, and more industries that will survive any sudden changes in the market or economy. 

If you do have experienced knowledge of one area, you can take advantage of that and buy in an area that most investors might not be looking at. 

The Seller Is Questionable

If you don’t know the seller or have never met them, you may want to research their credibility. Do they have a reputation for being honest and transparent? 

When you’re investing in real estate, it can help to understand who is selling the house. If there are any signs that they have sold sketchy properties in the past, this is a red flag. 

You should also take notes of if there are any signs that they are being dishonest. Do they seem knowledgeable about the property, or do they ignore all of your questions? 

Do they give you numbers that don’t make sense? Are they trying to rush you into buying the property? A seller should be open to answering any questions in an attempt to successfully sell the house. If they’re trying to rush you into buying the home, there may be something wrong with it, and they want to get rid of it as soon as possible.

Missing Details

When you look at the listing, make sure there are as many details as possible listed. You’ll want to see if the square footage calculations are listed and make sense. 

Is there a missing bedroom from the listing? There might be a bedroom that is in there but not up to code. 

You should also have information on when the house was built, if there are any extra fees, and if the property was surveyed. If there are details missing, this might mean that the property isn’t a good investment. 

Signs of Water Damage

When you tour the house, look around for wet areas that could indicate there is water damage. Some sellers will try to paint over it in an attempt to hide it, but you still might be able to notice. 

The water damage could also be a red flag that there is a great environment for mold to grow as well. Make sure that you look in common areas for water damage, like underneath drawers, sinks, and the walls around toilets, sinks, and showers.

Mold can also be growing underneath windows if there is a leak. Check underneath the window sill. If you see that the sheetrock is soft or warped, there are leaks coming through the windows.

A seller might try to paint over the window sill to mask this, but this is a sign that you need to look for a new investment property.

Discover More About How to Spot Bad Investment Properties

These are only a few signs of how to spot bad investment properties, but there are many other factors to consider. 

We know that becoming a good real estate investor can be overwhelming at first, which is why we have a course that can teach you more about making successful real estate investments.

Click here to sign up for our real estate investing course today!