In part one of this series, we covered red flags specific to the property, i.e. from the walls in. These are not the only source of red flags for investors, however, and every real estate investor should also consider the area and the conditions in a market. Often a good deal can tarnish if the these factors offset or eclipse the merits of the property. In part two, we review some of the external 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.
Environmental Hazards: Beyond the Surface
Imagine a property situated close to landfills or industrial facilities. This is more than just a matter of the view; it extends to potential health risks and impacts on property values. Overlooking these environmental red flags may result in limited market demand, challenges in securing financing, and even potential legal complications. The ramifications are not only financial but could also involve navigating intricate legal landscapes.
Zoning and Regulatory Issues: Unraveling Legal Entanglements
Consider a property entangled in zoning violations or legal disputes. It’s not merely paperwork; it could lead to severe restrictions on property use, protracted legal battles, and, in extreme cases, forced property changes. Ignoring these red flags may result in significant financial losses, impeding the realization of the property’s full potential and entangling investors in prolonged legal complexities.
Another aspect of this category is the regulatory trends in the area and whether these trends could turn against the investor. This is especially prevalent in the short-term rental space, but it applies to all regulations. Many would be short-term rental moguls have been caught flat-footed when the areas that they bought severely limited or fully banned short-term rentals to disastrous results. I know most investors look at the rules at the time that they buy, but you must read the tea leaves to avoid having an albatross in their portfolio.
High Vacancy Rates in the Area: A Neighborhood’s Pulse
Now, envision a neighborhood marked by numerous vacant properties. This goes beyond mere aesthetics; it could signify a locale in decline or undesirable. Disregarding this red flag may translate into challenges in finding tenants, diminished rental income, and struggles in achieving property appreciation. Understanding the neighborhood’s vitality is integral to making informed investment decisions.
Like the regulatory environment, would be investors should analyze migration trends and whether decent vacancy rates could be headed to higher numbers. Many things can spark migration from pandemics to greater job opportunities in other regions. This will not leave landlords unscathed. If the possibility exists that finding renters will be harder and rents may decrease, further analysis should always be high
on the task list.
Undesirable Location: Addressing Tenant Appeal
Imagine a property situated behind railroad tracks or next to a bustling gas station. It’s not just about the address; it involves potential challenges in attracting and retaining tenants, lower rental rates, and heightened turnover. Advertising and showcasing such a property become more laborious, impacting the investor’s bottom line. Evaluating the property’s location is not just about physical coordinates; it’s about understanding its impact on tenant appeal and the overall success of the investment.
Beyond the tangible, investors need to look at more subject aspects of desirability. Anything from crime rates to declining school quality can put a dent in the serviceable market. Like homeowners, renters want the best for their families and they will make decisions based on this. How often have you heard stories where a parent moved away from a tougher neighborhood as soon as they could to give their children opportunity? Likely more than you can count. If an area is plagues by less desirable features or if it is headed that way, the property may not be a good long-term deal.
Busy Streets: Balancing Location and Tenant Satisfaction
Envision a property located on a bustling, noisy street. It’s not merely about traffic; it can lead to diminished tenant appeal, difficulties in renting, and potential dissatisfaction among tenants due to noise. Privacy concerns and disturbances from passersby can make a property less attractive to potential tenants. Recognizing the balance between location and tenant satisfaction is crucial for long-term investment success.
This also includes parking. I lived in an area where parking was insufficient for the population. There were many areas of the village that were solely street parking. I was a homeowner and dreaded the daily circling to find a spot that was not block away from my home. Being close to public transportation and a business district, the problem was amplified due to commuters and people on a night out. Properties in areas with less competition for street parking or, even better, deeded parking or a garage were even more desirable.
Look Beyond the Walls
Remember, buying as an investor is a complex undertaking. There are a lot of considerations and some should absolutely raise red flags that a minimum require further review and analysis. Anything that costs you more reduces profitability. Investors need to consider every aspect of a property that diminishes the ability to maximize rent and possible renters. Red flags are good. They get your attention, but they only help if you react to them in a manner to prevent disaster.