5 Tips For Picking a Winning Investment Property (& 5 Red Flags to Avoid!)

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For those of us investing in real estate, we can all fall in love with the wrong things. As much as we try to stay objective in our real estate dealings, we can fall sway to charms — of a property, an idea, or a long-held dream.

Maybe you’ve always wanted to own a property like that — in that area, at that price point. It looks perfect. Something about it just pulls you in, and you want to put in your portfolio.

You have to make it yours.

Maybe you have always wanted to own a multifamily property or have driven past a property hundreds of times on your way to work and always dreamed of owning it. These are the thoughts that go through our heads and often lead us to dream our way into an investment.

Sometimes gut instincts are right. They can lead to good decisions. They can also lead to very bad decisions! Rather than paying attention to how you feel about any given deal or property, there are objective points that will help you know if an investment property is poised to bring you a solid stream of passive income or not.

Objectivity is not something often talked about here on BiggerPockets.com either in the Forums or the blog. The ability to be objective when so many decisions are made from emotion is a very tough skill to learn. There are a ton of great articles on how to be successful and how to pick great properties and great deals, and this one may not be that much different. However, I want to make it different by focusing on being objective and simply going after deals based on a few simple questions.

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5 Signs Your Invest Property Is a Winner!

1. The neighborhood is good.

Remember, many of the factors that make a property a good investment have nothing to do with the property’s own merits. A good neighborhood is paramount to the success of your investment. Not only does that mean little things like good neighbors and a lack of eyesore properties, but it also means things like proximity to attractive amenities and places. Colleges, medical centers, areas with shopping and businesses — these are bonuses that can all attract a larger pool of tenants.

Related: 7 Signs You’re Entering Into a House Flipping Disaster

This is where having someone with real market insight is invaluable. They’ll have an understanding of the nuances in the market that data may not clearly reveal — like which neighborhoods are up-and-coming and which ones are on the way down. It can come down to the very street you’re on.

2. The area rental prices make sense.

At the end of the day, what you’re able to reasonably charge for rent is what will make your passive income. When you compare rental rates in your area, will you be able to fairly charge your tenants while still making enough of a profit after maintenance, management, property taxes, and other expenses? If what you’re able to charge doesn’t make sense in the scheme of things, the property may not be a fit.

Remember that a great property management company can absolutely out-perform the marketplace. Keep a close eye on rents and remember to choose the best management possible. Management can be the difference in rent performance.

3. The inspection checks out.

Always have a property inspection — even if everything looks great, sounds great, and seems great. You don’t want to risk a devastating surprise after you’ve closed the deal. When you’ve had the seal of  approval from a trusted professional, you’re helping guarantee that you won’t be bamboozled by unexpected problems that can cost you thousands in repairs.

Third party inspections are a great way to build trust in the deal. If a company discourages inspections as a policy, regardless of reasoning, consider that a reason to question the deal.

4. Crime statistics give a positive outlook.

Sometimes, crime is evident. The presence of abandoned properties and vandalism are pretty common red flags — but crime isn’t always easily identified. Go to the police or public records to see if you can identify various types of crime rates, everything from petty crimes to more severe, violent crime. Obviously, safety is a big draw for tenants, and crime is a repellent. For you, crime rates also pose a danger to your property: Vandalism, break-ins, property damages, and even squatters can pose issues in high-crime areas.

5. Minimal repairs and renovations are required.

It’s not likely that your investment property will be perfect. It doesn’t have to be! There will be renovations you’ll want and need to make to create property value and draw in tenants. That said, certain properties will demand more work than others. Many investment properties tend to be older, and that can be good and bad. Some old-fashioned architectural styles are back in vogue, charming, and even desirable — while others, not so much.

Some bad, dated aesthetics can be easily fixed — bad wallpaper, for example. Dated and garish bath fixtures? Pastel peach countertops? Those are a little harder to salvage. When an entire property is extremely, unattractively dated, it makes it more difficult to attract tenants (or future buyers).

That’s not even covering major repairs that may need to be made to bring a property up to good standards; that’s just talking about aesthetics.

When considering a property, remember: You’re not buying its potential. “Good bones” are not always enough. You’re buying it as it is. You have to weigh whether or not the cost will be worth it.

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Keep These 5 Red Flags in Mind

1. The numbers don’t add up.

Don’t try to fit a square peg in a round hole. If the numbers don’t make sense, they don’t make sense. Run real numbers, using your real experience, and let them speak to you. I will take regular, bland and vanilla returns on paper and in real life all day long over the super exciting and completely unrealistic numbers I often see floating around on great deals.  

2. Solid facts are elusive.

Does the seller dodge questions about the area or property? They may not really be hiding anything from you, but always check to be sure. Not to mention, you always want to do business with people that you like and trust, and someone’s ability to answer questions thoughtfully and thoroughly goes a long way.

3. Looks good on paper, not so much in person.

Even if you don’t see the property yourself, make sure someone you trust does. What looks good in pictures or on paper can tell a different story in person.

4. The property seems too cheap to be true.

Unless you’re a fix-and-flip investor, a massive overhaul is not likely the kind of investment you want to pursue. Skip these if you’re looking for buy-and-hold rental properties. Snapping up those cheap properties might seem like a good idea, but they can be a big headache.  

Related: 4 Surefire Signs Your Property Investment Deal is a Fraud

5. The area is in decline.

Pay attention to your property’s surroundings. What are the conditions of the schools? How are crime rates? Which areas are being revitalized? Which ones are declining? Mind these trends. They will impact you, not only for your future properties, but for ones you already own.

These are simple tips and often they are overlooked. I have written several articles about the fact that it is very easy for us as people to lie to ourselves. It seems like when you add in the fact that we are real estate investors — and as we all know, the 411 on real estate investors is that we are impulsive, emotional and at times irrational — well, it just made sense to remind us all to be objective when investing.

How objective are you as an investor?  

Tell me what you think are the best tips for investors to stay objective and make great investment decisions.

About Author

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

7 Comments

  1. Excellent tips here. It’s so important to consider all of these factors when looking into properties. While you can’t predict the future, there are signs to look out for of whether or not it will be a good investment.

  2. Ekaterina Gelashvili

    Great article and tips Chris! Thank you!
    It’s always better to have boots on the ground or visit the desired area yourself. I think the location is the most important part when buying property, especially out of state. The price might be tempting in some areas, but most of the time they aren’t as good as they seem. Cheaper isn’t better!
    Thanks again Chris for the great article!

  3. Casey Murray

    Great article, Chris. Knowing your numbers is huge. At the end of the day, cash flow is paramount and knowing the market and running accurate and realistic numbers is the objective. Better to fall in love with the numbers before falling in love with the property.

  4. Lorin k.

    Vandalism would be my biggest worry. BTW here is something to note. If the house is alone in the woods and no neighbors live in close proximity to the house, then vandals can have a hayday braking windows, damaging floors, splashing paint around the house. I saw a house that was out of town and was WAY bellow value and I think it was just for this very reason.

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