3 Things That You Should Avoid When Buying A Rental Property
If this is your first time reading I’m Dave. I know buying rental properties can be a scary process when you are first starting out. When I got my first rental property, I didn’t have anyone to tell me the do’s and dont’s of investing. I now have 3 rental properties that you can read about here, here and here. Over time I have bumped my head a few times, each time learning valuable lessons. From the experience I have gained, I want to share with you 3 things that you should avoid when buying a rental property.
Avoid rental properties in bad neighborhoods
What is the neighborhood like?
This is important because the people in the area are generally going to be the type of tenant you can expect. If you go to a neighborhood and you see heavy drug activity, vacant homes, gun violence, boarded windows, and the general consensus that the residents don’t take pride in their envirionment, then the majority of your tenants may be similar.
This isn’t always the case obviously, as you can find a good tenant for any neighborhood if you know how to find a good tenant, but the chances are much lower. Don’t get me wrong, because of the cheap prices that often tempt new investors, you can make some large returns, but there may be more issues that cause this to be less passive and may be better suited for seasoned investors. Do not get these war zones confused with low-income areas. Investing in low-income areas can yield some high returns and low investment with less hassle.
Avoid rental properties with Structural Issues
To me, structural problems are the “head-gasket” of rental properties. If I see structural issues, I make a speedy Gonzales style B-line toward the door. I’ve just heard too many horror stories from investors having to call in and pay structural engineers and you can probably guess its a very expensive process. The problem with homes with structural issues is that once these issues occur, they are usually documented and attached to the homes “permanent record”.
Therefore this will need to be disclosed when you sell. Even if you shell out the cash needed to properly repair, in most states it will still need to be disclosed. From my experience, homes with these type of reputations generally sale at a fraction of its ARV. Some things to look for to determine structural damage are cracks that appear to be. Another sign to look for is when doors in the house don’t properly close. When houses have foundation issues it’s not uncommon for the alignment of the door and frame to become warped.
Avoid investment properties with severe termite damage.
While I won’t completely write off a deal with termite damage, it’s important to evaluate both the extent of damage and if there is a current infestation. Sometimes you can catch it early, but even then you should reflect this discovery in your offer.
Termites can be a hassle to get rid of, and if not properly eradicated, they can literally compromise the structure of your entire house. A great way to check for termite damage is to take a screwdriver and moderately stab around the baseboards and if at any point you put a hole in it, there is probably termites.
Termites eat the inside of wood so it may appear ok until you do the screwdriver test. Another place you should do this is around window sills. Always call a professional if you suspect termites and let them give you their synopsis. Most termite companies will do a free estimate, so call a few. Make sure you mix it up and call a few corporate places and some mom and pop exterminators. These companies are sometimes just looking for a quick sale so having a few different opinions can give you a general consensus.
There are literally tons of things to consider when purchasing a house for a rental property, so always do your due diligence and be aware. Hopefully knowing these 3 things that you should avoid when buying a rental property will save you some money and headache in the long run. Avoiding these simple mistakes will set you on the best path to start building your passive income.
What are some things you avoid when looking at rental properties? Let me know in the comments sections below.