4 Symptoms of a Toxic Investment Property

The number of housing units occupied by renters in the United States has been steadily increasing since 1975, but there has been a sharp upturn in the past few years. In 2015, there were 43.58 million renters occupied housing units; this is up from 38.02 million in 2010. As housing demand rises, more rental properties are becoming available which means more investment opportunities. The question is, how do you know what is a healthy property that gives you a good return, and what is a toxic one that will rob you of all profits? Toxic property management is a soul-sucking, profit-draining venture, but there are ways to spot a toxic property before you get sucked in. Look for these four symptoms of a toxic property investment:

Low Rent

A property that garners low rent should be a big red flag. Now, the concept of low rent is subjective, so there is some analysis that you need to do. Look at the scale of rent in the area where the property is located and determine the high end, mid-point, and low end. If your property falls within the low end of the scale, it is a low-rent property and that could signal a toxic property. Section 8 property can also be a money pit. There are many regulations that are required for this type of property and although the government does subsidize the rent, the type of renter it attracts can be hit or miss. Some Section 8 renters are fantastic tenants while others are the scourge of the earth. Yes, the world needs Section 8 housing, but does it have to be a property that you own? Think long and hard before taking on this type of rental property. The area in which a rental is located will often dictate how much rent you can charge. Consider it realistically. Low rent areas tend to attract a certain type of tenant – and they are usually not very good ones. Before you take the plunge, take a look at the property and the area where it is located. Ride through there on a Saturday night and see what type of activity is taking place. You can also contact the local police department and ask them about the types of calls they get for that neighborhood and how many calls they get. It is important to do your homework at the beginning so you don’t get burned in the end.

Crappy Tenants

Even if your property is in a great place, if it has crappy tenants it could really drain your profits. You can spot them by their distinctive markings. Always late with rent – This tenant couldn’t pay their rent on time if their life depended on it. If you are purchasing a property with tenants already in place, ask to see the rental payment records. If you see consistently late payments, run away – fast. They are living there and they need to pay on time, full rent, just like everyone else in grownup land. Destructive – This tenant leaves your property looking like a disaster zone. They may act shifty when you want to enter the property. You may see items strewn across the yard or piling up on the balcony, broken windows, holes in the walls and other damages. Adjoining neighbors may complain of roach problems although they make every effort to prevent pests – including clean their living space. Once you do get inside, the property looks like an episode of Hoarders. Trouble with the law – Do you really want to rent to a tenant who is known by the police because they have been called out to his home so many times? This includes the police being routinely called for excessive noise, fighting, public intoxication, and just causing trouble in general. If the police are riding out to speak with this tenant every weekend, you probably don’t want him renting from you. Just plain slippery – Some tenants are just plain shady. They are very slick, making threats of government inspections or lawsuits when pressed for rent or asked to comply with the property rules. The tenant may ease right up to the line of rule breaking, but the general sliminess of this character should be a tip off. If you do rent to him, you will have to keep one eye on him at all times.

Trouble Filling Vacancies

If you have trouble filling vacancies that could be a big tip-off that something is amiss. Look at the area, of course, to see if that holds any clues, but also examine the property. There are many reasons that people don’t want to rent certain properties. They may feel that the rent is too high for the area, they may notice that the property is run down, and they may read online reviews from other tenants. Take a look at sites like Yelp and see what the tenants are saying. Unhappy clients can lead to empty properties. A bad investment property may not necessarily be a ramshackle hut that is falling down, but simply a property that requires more money for upkeep than it can get in rent. If the property has high payments or taxes, or if it has a lot of maintenance issues, but is in a lower rent area, then you will either have to raise the rent, and risk not renting the place out, or keeping the rent low and eat the expenses, and potentially go broke. It can be a complex decision and you may find a property is simply not worth the risks.

Maintenance

Speaking of maintenance, a property that requires too much maintenance, or has significant deferred maintenance, can be a really bad investment no matter how little money you have to put down to get it. When you end up spending more time and money making repairs than you are actually pulling out, you have a problem. Maintenance can be one of the greatest financial drains with a rental property. Under most state and local laws, the landlord is responsible for most maintenance and repairs in the house or apartment. If a water pipe breaks, the landlord could end up paying for the repair of the pipe, clean up, and even for damages to the tenant’s belongings (It doesn’t hurt to require tenants to have renter’s insurance.). Replacing major appliances like refrigerators, washers, and dryers can also get very expensive, very quickly. What it all boils down to is are you spending more than you are making? Simple question, major implications. Toxic property management is both emotionally and financially draining. If you can spot it before you actually make the purchase, you can save yourself a tremendous amount of grief and expense. If you already own the property and see it moving in that direction, the earlier you catch it, the easier and less expensive it is to correct it and get back on track. This is important because you don’t want to dump a bunch of money into a property that will not give you a decent return – or worse, end up costing you money. It isn’t worth it. Naturally, the ideal scenario is to avoid a bad investment property completely. While some can be rehabilitated, that takes a certain amount of expertise, a lot of time, and usually a considerable amount of money. You may do better investing in a more expensive property in a better area simply because the property is healthy. The bottom line is, don’t leap before you look – and look hard, really, really hard. Then again, it could be you just need a good property management company.

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