Most successful investors will tell you that they’ve made at least one bad investment, whether it’s apartment real estate or single-family homes. Real estate investing is a learning experience, but understanding the factors that make a weak property investment can help you avoid making costly mistakes.
So, what makes a property a weak investment?
Location is everything in real estate, and multifamily properties are no exception. Sure, a property may be dirt cheap, but if it’s in a bad location, your investment may quickly turn into a money pit.
Signs of a bad location can include:
- The housing market is flooded. If nearly every house on the block is for sale, this may be a sign that people are moving away from the location in droves.
- High crime rates. Most people prefer to live in safe neighborhoods and towns. Check to make sure that crime isn’t on the rise. This could be a red flag that the location is on the decline.
- Empty storefronts. If Main Street is filled with properties that are for sale or lease, this could be a sign that the local economy isn’t doing so well. Local residents may not have a lot of disposable income, which may mean that properties are not well kempt, or foreclosure rates may be high. This can bring down property values.
- Restrictive HOAs. Some HOAs are so restrictive that it can become an issue with tenants or even renovating your property in the future.
- Homes are not well-maintained. Poorly maintained homes can be in any type of neighborhood – low-income or high-income – and they can bring down property values for everyone. This can also be an indication that the property you’re considering has bigger problems than meets the eye.
Location is one of the most important factors to consider when investing in multifamily properties, so make sure that you’re doing your research and avoiding bad locations.
It doesn’t matter how cheap a property is, if there’s no demand, your investment will fail to yield a return. Perhaps you’ve found a triplex in a great neighborhood at a great price with minimal renovations required. On paper, the deal is too good to pass up.
But upon closer look, you find that the person selling the triplex hasn’t had a tenant in six months. In fact, most people in the area are homeowners. The number of renters is surprisingly low, which indicates that there isn’t much demand for rentals.
To gauge rental demand, check out the local rental market. Is it oversaturated? This may be a sign that supply is outpacing demand. You can also check to see the percentage of homeowners vs renters and look at statistics for rental prices over time.
No matter how great a property may seem, it’s a weak investment if there’s no demand for rentals.
When many people start investing in real estate, they look for properties that need work and have a lower price tag. But underestimating the true cost of repairs – in terms of money and time – can be a costly mistake.
If a property’s repairs cost more than it’s worth or it’s going to take an extensive amount of time to get the property rental-ready, it may be a weak investment.
The Bottom Line
Not every property is a worthwhile investment that will generate great returns. A weak property investment will, at best, give you lower-than-expected returns or, at worse, bankrupt you. Take the time to carefully analyze each property to reduce the risk of costly mistakes.