Real estate is one of the oldest and most enduring industries in existence. Its constant and cyclical nature is what gives it its staying power since the need for new houses to live in, new buildings to work in and new facilities to provide services to the public, shows no sign of slowing down.
Investing in rental property has long been the preferred route for those looking to diversify their income beyond stocks and mutual bonds. Unlike those more mainstream investments, real estate investments can require some substantial problem-solving, including managing tenants and keeping track of maintenance issues.
Nowadays, real estate investing offers the opportunity for highly lucrative investments and often attracts people from all walks of life, including upbeat go-getters who want to expand their portfolios, as well as get-rich-quick hopefuls expecting speedy revenue streams. The real benefits, however, range from stable cash flow to lower vacancy risks. These things, coupled with the fact that it is a less saturated market with less competition, can make even the most novice investor rapt with possibility. But, if you don’t make sound business choices early on, you are likely to wind up in the same predicament that many investors have fallen prey to in the past.
The reality is that bad investment opportunities can be just as hard to spot as the good ones. To ensure your success, we’ve come up with a list of some of the common red flags to look out for when embarking on your next real estate venture.
Too much maintenance
Sure, there may be plenty of properties that look promising online or on paper. But, when you actually witness the leaky faucets, broken ceiling fans and crumbling drywall in person, it can tell a slightly different story. While the need to perform maintenance and repairs on rental property is inevitable, it shouldn’t be excessive. If it gets to the point where you consistently have to budget for electrical system overhauls, foundation upgrades, and extensive roof and wall work, it may not be the best investment in the long run.
A neglected or deteriorating property might cost more trouble than it’s worth if you’re ultimately expecting to be profitable. If a house has structural damage or other issues that will require a long inventory cycle or cost so much that they’ll eat up your profits, then it’s best to pursue another opportunity. Pay close attention to these issues before purchasing as the amount of repairs should NEVER outweigh the potential profits.
The property has been on the market for too long
Approximately 20-30 percent of properties fail to find a buyer. Property that’s been listed for too long can be an indication of defects in its condition or of a price point that exceeds the local market conditions.
If a property has been on the market for longer than six months, it’s likely that other investors have had a chance to look it at too. Therefore, the property might not be worth purchasing if it’s being overlooked by other investors. Obvious or not, there’s a reason it’s not selling.
Does not fit in your budget
The central goal of every real estate investor is to achieve a positive cash flow on their investment property. Simply put, cash flow is the amount of profit that your investment property is making after all of the expenses related to your real estate investment are accounted for. These expenses can vary widely depending on factors like its location, its condition, and the type of tenants it attracts. Any costs associated with the investment must also be included in the final calculations from property taxes, mortgage loan expenditures, electricity and water bills, and property maintenance.
A positive cash flow, in that regard, is a real estate property that is generating more money than what it costs in a single cycle, which can be calculated either monthly or annually. Positive cash flow is imperative when it comes to owning an investment property. Keep in mind that if you purchase a property which initially brings negative cash flow with the belief that it will eventually start generating positive cash flows, you will end up having to use money from other sources (salary, savings, etc.) to finance the property. Thus, aim at positive cash flow since the overall objective is to make money, not owe money.
When it comes to assessing the value of real estate investment opportunities, it’s all about comparing risk factors. By now, you’ve seen how important it is to do your due diligence and stay well-informed. It’s important to be objective and have your eye clearly on the end game – a successful real estate investment. So, take a deep breath and listen to what market is telling you so you can maximize your income potential and become a seasoned investor in no time!