Red Flags to Watch for When Buying a Rental Property

When you think about red flags that might prevent you from purchasing an investment property, what comes to mind? A roof that needs replaced? A shot HVAC system? Sounds about right, since these are big-ticket items to repair. However, in my book, these are NOT red flags. While certainly expensive, these are things that are relatively easy to fix and therefore do not qualify as dealbreakers.

The real dealbreakers are those things that aren’t easy to fix, or worse, that CAN’T be fixed. Here’s what I’m talking about:

Location - This is possibly the biggest red flag of all. The location of a property is something you’re stuck with, whether you like it or not. You may have the absolute perfect house - great condition, ideal size and layout, tons of charm - but if it’s located in a less desirable area, you’re not going to see the profits you want.

High crime rate - Who wants to live in a war zone? Pretty much no one, so that means you’re going to have a difficult time renting out a property that is located in one. While crime rates can certainly fluctuate over time, investing in an area that has a higher than average number of crimes brings a lot of unnecessary risk. It’s not impossible to make a profit on a property located in an area like this, but you do open yourself up to lower quality tenants and a greater potential for property damage.

Crappy schools - The quality of the local schools also factor into my decision-making process when analyzing a potential deal. Areas that have decent schools are more likely to attract and keep tenants, so I try to focus on locations with better performing schools so I can keep my unit occupied by higher quality tenants.

Oversized lots - The idea of a having a huge yard is appealing to a lot of people - but not most renters (or most landlords, for that matter). Why? Because there’s a lot of upkeep that goes into maintaining that large lot. For this reason alone, I view oversized yards more as a red flag than a unique feature that may appeal to a small segment of renters.

Weird layouts - Have you ever walked into a house that didn’t flow well or had rooms that you weren’t even 100% sure what their purpose was? Or maybe the guest bath was right off the kitchen, or only accessible from the master bedroom. Whatever the case, weird or awkward layouts just don’t work for most people. They can make a property more difficult to rent out, and fixing them by reconfiguring the layout just isn’t cost-effective or feasible for most investors.

Tiny or minimal bedrooms - The bedroom situation can be another big red flag. If a property has just one or two bedrooms, I usually don’t even consider it because it immediately eliminates a sizeable portion of the renting populace. Same goes for properties with really small bedrooms. If you walk into a home with tiny bedrooms and feel cramped, imagine how a tenant is going to feel living there. For most, this doesn’t fly, especially if you live in a market where they have plenty of other options with larger rooms.

So there’s my red flag spiel. Not every investor is going to agree with these, and there are certainly instances where these haven’t had any impact on the bottom line. However, each of the above factors undeniably add risk to any investment, and none of them are easy (or even possible, in some cases) to fix. When making your decision on a potential investment, make sure that you calculate that added risk, and if your gut is telling you no, listen to it!