Red Flags to Spot When Buying an Investment Property – Part 1 – Property Issues

Embarking on a real estate investment journey is akin to setting out on a complex adventure, replete with potential challenges that demand acute awareness. These issues or red flags should move front and center in any analysis of a potential investment property purchase as they will have the greatest impact on a deals viability.  Categorically, investors can break down red flags into those related to the property, i.e. inside the walls, and the area, i.e. outside the walls. In part one, we delve into the internal red flags that may surface during the property hunt, signaling the imperative need for careful consideration and, in some instances, a judicious decision to step away.

Foundation and Structural Issues: The Pillars of Property Stability

Imagine walking into a property and noticing not just visible cracks but also uneven floors. These aren’t mere aesthetic inconveniences; they may be indicators of profound structural problems. Ignoring these early warnings might lead to a precarious foundation, both in the literal and figurative sense. The repercussions could extend to substantial repair costs, impacting the property’s stability, overall value, and marketability. While the aesthetic issues can likely be easily fixed anything beyond that can and likely will come at a high price tag.

Investors should also fully analyze the type of foundation.  Stone foundations, for example, can present a challenge for maintenance and repair while more modern materials are far less susceptible to problems and are more easily repaired.  This should not be a show stopper, but the wise investor will build the potential for greater costs down the road into their analysis.  If the numbers are super tight at the time of purchase, issues like this could be an impetus to walk away.

Water Damage and Mold: Silent Threats Beyond Aesthetics

Visualize signs of water damage on ceilings or walls—an ominous spectacle that transcends mere aesthetics. Beyond the surface lies the potential for severe disruptions to tenants, heightened stress, and significant repair costs. Water damage poses additional risks, including health concerns, potential damage to personal belongings, and the urgent need for temporary housing for affected tenants. Stains on walls or the hint of musty odors may seem inconspicuous but could snowball into increased maintenance costs, challenges in attracting tenants, and potential health hazards for those dwelling in the property.

Electrical and Wiring Concerns: Illuminating Safety Hazards

Consider a scenario where lights flicker or circuit breakers trip frequently. These aren’t just minor inconveniences; they serve as warning signs of safety hazards, including the looming risk of fire. If you have never seen things like knob and tube wiring, you might not fully understand the scope that electrical issues can cause, but suffice it to say that they cannot be ignored and, unless you are planning a full gut job, they can be costly.  Overlooking these indicators may result in unexpected repair costs, elevated insurance premiums, and potential legal liabilities.

Plumbing Problems: The Drip That Echoes

Leaky faucets, water stains, or poor water pressure may initially appear as minor nuisances, but when left unaddressed, they can morph into substantial issues. Untreated plumbing problems may cascade into water damage, structural issues, and inflated utility costs. Neglecting these red flags could lead to ongoing maintenance expenses and challenges in maintaining a habitable living environment.  Beyond the existing problems, investors should look at antiquated systems the same way that investors should fully analyze the electrical.  Old cast iron pipes can develop problems with rusting and sediment, so todays non-issues can be tomorrow’s catastrophes.

Poor Layout, Small Bedrooms and Unusable Space: Blueprint for Tenant Satisfaction

Consider a property with a poorly designed layout—not just an aesthetic inconvenience but a pivotal factor influencing tenant attraction and retention. A suboptimal layout contributes to increased wear and tear due to overcrowding, potentially diminishing the property’s value. A well-thought-out layout is not merely a visual aspect but a critical determinant of tenant satisfaction and the long-term viability of the property.

Room size, especially bedrooms, can also contribute to investment property woes.  Envision bedrooms capable of accommodating only a twin or full-sized bed. It’s not merely about the size; it extends to the difficulty of attracting tenants, prolonged days on the market, higher turnover, and diminished rents. Small bedrooms translate into a substantial loss in rental income, profoundly impacting the overall profitability of the investment.

Layout goes beyond beyond square footage concerns; it could lead to decreased tenant satisfaction, potentially higher initial purchase prices, and challenges in realizing added value.  I once owned a four-square that had an entry area that likely served a purpose during the early 1900s when it was built, but what I experienced was a 12 x 12 foot area that provided limited if any utility in day-to-day life. Addressing unusable space through property layout adjustments might incur additional stress, time, and expenses, but it is a crucial investment in the property’s overall potential.

Poor Bed/Bath Ratios: Striking a Balance for Tenant Comfort

Envision a property with inadequate bed-to-bath ratios. It’s not merely a numerical consideration; it could lead to heightened competition for bathroom space among tenants, potential disruptions in morning routines, and challenges in attracting tenants. Back to my earlier example, my four-square was in an area with many homes in the same age range.  Many had only one bathroom with on the second floor.  This was insufficient for modern living for the average family bringing down the properties overall desirability.  Properties with favorable bed-to-bath ratios are poised to garner more significant appeal among potential tenants.

Utilities and Other Critical Infrastructure: Balancing the Bills

Every property needs water coming in and waste going out.  The same goes for electrical and water.  This can sometimes be provided by the municipality or it can be specific to the property in areas where well and septic are more prevalent.  Repairs and replacement for these is always expensive.  I recently dealt with a septic replacement where the final cost was north of $40,000.  I acknowledge that this is an extreme, but even $10,000 can tip the viability of a property investment to a no.

In a multi-unit property, shared utilities can present unique challenges.  Consider a property where utilities are not sub-metered in multi-unit buildings. It’s not merely about managing bills; it could lead to increased responsibility for utility costs, potential tenant misuse of utilities, and elevated overall expenses. Sub-metering utilities empowers property owners to exercise control over costs, preventing financial burdens and fostering more efficient management.

Finally, the modern utility of internet can be a problem.  The expectation for tenants in our connected age is for fast internet.  While there are a lot of areas where fiber to the curb is the norm and dependable internet is not an issues, other areas such as where I live still languish in the world of coaxial cable and even some twisted pair and satellite options are the only options.  With a shift to work from home or hybrid business structures and the need for any students in the household to be connected, this is not an insignificant consideration.

Red Can Mean Stop for Some Deals

In conclusion, navigating the real estate market demands a discerning eye attuned to these red flags. Each visual cue is a potential indicator of deeper issues that could significantly impact your investment journey. Conducting thorough due diligence and remaining vigilant about potential issues empower investors to make informed decisions, avoiding financial losses, safety hazards, and challenges in realizing a property’s full potential. In the dynamic world of real estate, remember that a well-informed investor is a successful investor.

Have an immediate need for investment real estate financing or just looking to be ready  when you find that perfect property?