10 Rental Property Red Flags You Should Never Ignore

19

What are absolute deal breakers when it comes to a rental property? Technically, the answer is there are none — or just about none. Every piece of property has a value. Although, as Brandon Turner noted about one deal on the podcast I was lucky enough to be on, “…no matter how I did my numbers, in the end I always came back to they got to pay me about 15 grand to buy this house.”

Sometimes that value is negative.

A better way to put it would be “major red flags” when it comes to rental properties. But before we get to the list, a major clarification is necessary. This list won’t include things like “the HVAC is shot” because that’s just a matter of what price to make an offer at.

These are problems are structural in nature. And by that, I’m not talking about the actual foundation of the building, but something that is relatively unalterable about the property. Some of these problems may be at least partially fixable at a reasonable price, such as the point on storage. Others are not, such as the location or floorplan. But these are not items you can simply and easily add to a repair list and make them go away.

With that in mind, let us begin our list: 

1. The Proverbial War Zone

I wrote an article about how to analyze the crime risk for a potential deal that I would recommend reading to evaluate which areas are proverbial war zones. Furthermore, I wrote another article on why most investors (and all newbies) should avoid properties in D areas. The gist of it is that properties in such areas will usually cost more to maintain than the rent they bring in. And the risk is much higher, to boot.

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

Remember, square foot for square foot, a new roof or furnace will cost the same in D neighborhood as it does in an A neighborhood. If the rent is too low, it simply won’t cover the cost of such repairs. And add to this that crime is more common in these areas. It will take a long time at $500/month in rent to cover the cost of an A/C condenser that decides to grow legs and walk off. Tenants in these areas are also more likely to fall behind on their rent or do significant damage to a unit. While there are plenty of good tenants in rough areas, unless you specialize in these types of rentals, really rough areas should be a deal breaker.

30k-real-estate

2. Terrible Schools

Often, terrible schools go hand in hand with war zones, but no always. Some areas, particularly densely urban areas, have bad schools but some quality areas where most of the people who live there send their kids to private schools. While I personally find this dynamic to be tragic, there’s not much you can do about it as a real estate investor.

Bad schools is definitely more of a red flag than anything that would resemble a deal breaker. But after safety, the most important thing people look for when looking to rent a property (at least a family-sized property) is the quality of the school district. So keep this in mind. GreatSchools.org is a good place to go to evaluate any given school district.

3. Houses With Only One or Two Bedrooms

I hesitated to even include this because it is absolutely not a deal breaker. But it is worth noting that one and two-bedroom homes are not what any family is looking for, so with these types of houses, you will generally have a more transient clientele. Now, with some such houses, you can add a bedroom, which can be a great value-add. But with others, there simply isn’t the space. Small houses can be risky, and the tiny houses movement is too likely to be a fad to be worth investing in as rental property.

That being said, I have heard of one investor who specifically looks for one-bedroom homes and rents (mostly) to elderly people, and he does very well with it. For our part, we have plenty of two-bedroom houses, and they do just fine. But you definitely need to know what you are getting into with such homes.

4. Huge Units

A 3,000 square foot house does not often make for a great rental. Again, this is not an always proposition, though. But for the most part, the maintenance and turnover will be much higher on such large properties simply because of the sheer size of it. Furthermore, most people looking for such a house will be buyers, not renters.

We find our sweet spot to be around 800 to 1,500 square feet for houses.

what-is-a-jumbo-loan

5. Huge Lots and Rural Properties

I put these two together since they tend to go together. Now, a big lot is a good thing. But if you are looking at anything too large, especially over an acre, I would start to get nervous. For one thing, that’s a lot of yard maintenance to deal with upon turnover. Furthermore, most people don’t want to take care of such a large yard themselves, so you will turn off a good number of potential tenants. Or you may get a tenant who simply won’t take care of the yard, and then you will start getting letters from the city.

Rural properties are also difficult to manage since they will generally be far away from you. I’m not a fan of rural properties in general (although, for some, I’m sure it’s a very profitable niche). But my advice would be that if you want to invest in rural properties, they make for better flips than holds most of the time.

Related: 10 Glaring Red Flags That Indicate Your “Great Deal” May Be a Costly Scam

6. Any Sort of Environmental Problem

OK, another major disclaimer — this could be a goldmine for a savvy investor who will buy what others won’t. But if you have toxic waste dump or an underground leaking oil drum or the unit is going through meth abatement, unless this is your specialty, move on to the next one.

7. Tiny Bedrooms or Kitchen

There are some instances where you can fix a tiny bedroom or kitchen by removing a wall here and adding a wall there. But often, there’s no economically good way to do it. Some old houses are just designed in a way that makes me think the architects were on LSD — even though that drug hadn’t even been invented when those properties were built. I’ve seen massive and useless hallways connecting one tiny bedroom to another in a 1,200 square foot house with no conceivable way to add a third bedroom. It’s endlessly frustrating.

But it’s important to note that potential tenants do not decide on which property they are going to rent by plugging the amenities and specs into a spreadsheet and running a logarithmic, covariate algorithm that takes the least-squares regression of the hypotenuse to determine the best value. They make their decisions based on emotion and livability. Tiny bedrooms are a huge turnoff for anything other than the third bedroom, which is often used as an office, library, or nursery. A master bedroom is a huge plus, but the first and second bedroom need to be of decent size (at least 10 feet by 10 feet or something equivalent).

And they say that kitchens and bathrooms are what really sell houses. I think the kitchen is particularly important, and a tiny kitchen that cannot be expanded or opened up is a huge turnoff. Not necessarily a deal killer (remember, every property has some value), but it’s a big red flag.

airbnb-tax-impact

8. Awkward Layouts

Can you only get to the bedroom from the kitchen? Is the only bathroom right next to the kitchen? Can you only access the garage from a bedroom? Is the only door to the backyard through a bedroom? Is the second bedroom only accessible from the first (which, I should note, means it’s not a bedroom)? Is the only access to the unit’s only bathroom through one of the bedrooms in a unit that has more than one bedroom?

Maybe you can fix these problems by moving a wall or whatnot. Maybe you can’t. If you can’t, that is a major problem that seriously affects the properties sale and rental value. And tenants, like homeowners, generally don’t like awkward properties.

Obviously, it doesn’t mean the property is worthless, but it is another major red flag.

9. No Storage

Say you have a three-bedroom, two-bathroom house with no garage, basement, or bonus rooms. You need to note that the lack of storage is a big negative to potential tenants. Not a deal killer, of course, but a red flag nonetheless. The best remedy, we have found, is to add a shed in the backyard. Both Home Depot and Lowes sell such sheds at reasonable prices. But this is an imperfect solution at best. So be careful with a house that has no storage.

It’s safer to buy apartments with minimal or no storage, particularly with smaller units, as 1) the tenant doesn’t need a lawnmower or anything like that since they are not responsible for the lawn and 2) it’s less likely to be a family living there, so the person likely has a lot less stuff.

10. Local Governments That Hate You Simply Because You Exist

OK, that may be a bit of hyperbole. But it’s extremely important to know how landlord-friendly any municipality you intend to buy in is. Some cities require landlords to have annual property inspections, which are both expensive and arduous. Are you willing to put up with that? Other cities, particularly on the East Coast, have eviction laws that are so strict, it can take three months or even longer to evict a non-paying tenant. I’ve even heard of it taking as long as a year, especially if the tenant knows how to game the system.

first-eviction

For a rather extreme example, here’s how Global Property Guide describes the eviction process in the Netherlands:

“Landlords can only give notice in strictly defined cases, and it is extremely difficult for owners to evict tenants once they are established. Only the judiciary, and not the landlord, can terminate the contract, and only after the landlord has given notice of from three to six months. Where the contract is for a fixed period of time, he is restrained from giving notice except towards the end of that period.

“Limited arrears in payment of rent are in general insufficient grounds for a rescission of the contract; only an order for payment can be achieved. In the case of arrears of up to three months, rescission will be denied. Nuisances committed by tenants tend not to be a good basis for eviction; they tend to be denied by tenants, and the court procedure is costly.”

If there’s anyone from the Netherlands who would like to correct me on this point, I’m all ears. But for now, I’ll probably pass on investing there.

On the same note, HOAs can be similarly difficult and anti-landlord in some communities. We’ve all heard of the petty tyrants that have rises to power in some HOAs. Such properties are generally to be avoided.

Conclusion

To wrap it up, it’s once again critical to remember that there really is no such thing as a deal killer. After all, I for one would be willing to buy any property in the country if they paid me a billion dollars to do it. But there are major red flags that will kill most deals. When looking for rental properties, the above list are some of the big ones to watch out for.

Which of these red flags have burned you? Anything you’d add to the list?

Let me know with a comment!

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

19 Comments

  1. Eric Robinson

    Hi Andrew, great article! There’s one I might add to the list – and that’s lack of parking space. I recently found a really nice multifamily property in a decent area. Almost everything about it is what I was looking for, except there was no off-street parking. Knowing this might be a deal-breaker for some tenants, making it harder to lease out, I decided to pass on the property.

  2. Kent Harris

    Your absolutely right about purchasing big houses. I have a total of 12 houses which 4 of them exceed 2,100 SQ FT. Two of them a tenant will move in and four months later they will move out. I won’t lease to a couple unless they are Married or Gay, even Brother and Sister don’t seem to stay long. When a couple breaks up, they move out, since they can’t afford the rent on a big house by themselves. Since I live in the Houston area with many oil jobs, there are a lot of people from other countries with work Visa’s. I have been renting my big houses to people from other countries with no problem at all. The rent gets paid on time and my houses don’t get destroyed. On one of my smaller houses a person got deported and all there content was still in the house. It took about a week to get an affidavit so his cousin could pick up his content. Now when someone moves in I have them fill out a permission contract to let there relatives pickup there stuff. Also the houses in my Neighborhood are 3,200-4,500 SQ FT. Nothing has rented in the last 18 months! Now my business model is 3 bedrooms and 2 baths only. I purchased a 3 Bedroom 2 Bath about 2 months ago and did a full rehab. I put it on the market and 3 days later it was leased!

  3. My experience on larger homes has anecdotally been the opposite. I have one at 3400 sq ft which has had no vacancy in 9 years, 2 tenants and has been relatively low in maintenance. Rent per sq ft is a little less than my smaller properties, but not too much. Probably been a bit fortunate, but the market here I think favors larger properties (4/3’s). To get into a home of that size (3400+) will cost you close to 700K in my market so that means we have more than just a few renters in this large sq ft category, which I think in part explains why I have not had a vacancy since I acquired it in 2008. I probably won’t buy another one that large (shooting for about 2500), but my big one just keeps rolling along strong, no problems.

    • Chin P.

      Less desirable of course. To me it depends on the neighborhood.

      If it’s a desirable area for tenants and all of the other houses are 1 baths, then I think you’re okay as tenants that want to be in that neighborhood have to accept 1 bath by and large. Tenant pool is likely also accustomed to accepting that (e.g. what tenants will accept and think is normal is different in NYC versus LA versus some rural part of the mid-west). Though I would still look to see if I can add at least a half bath somewhere for a reasonable cost.

      If area is not popular with tenants or most houses have more than 1 bath, then I would think twice. Can I add a bath or half of one? Is there some other great feature compensating for only 1 bath? Is it such a deal that I can compensate by offering it for a significantly lower rent?

    • Andrew Syrios

      There are renters who will rent them, but they’re not usually seen as desirable. I mentioned the investor I heard of who often rents them to elderly people, but we’ve also had some luck renting them to individuals who would normally rent apartments, but really like their pets, particularly dogs, and so they want a house. Every property has some value, you just need to know what you are getting into.

  4. PJ Muilenburg

    I’m still trying to decide how big is too big fire my market. Just bought my third property earlier in January and it’s 2000 sq/ft, not huge but bigger than most rentals around here. Cash flow is great and I love love the ease of manging the higher earner tenant pool….but fear turnover will be quick. People who can afford to rent that can afford to buy….matter of fact the tenants in there now are about to custom build and move after their year lease. I’m just still deciding if, in future deals, the frequent turnover is worth the added cashflow and easy tenants.

    • Christopher Smith

      My experience is totally different than most are asserting based upon this general rule of thumb.

      I have several large rentals (my smallest is about 1900 sq ft, and largest is over 3000 sq ft, and then everything in between). All have done exceedingly well over the past 5 to 10 years (the period I have owned them), for some of the reasons you note and others. I personally have had very little if any turnover during that time and essentially no vacancies, they house great middle and upper middle class tenants, and as you note they are relatively easy to manage with high cash flow. As the size gets larger the rental rate per sq ft does drop some, but its very gradual.

      So I would be very careful about generalizing across any broad class. I just went out recently to price larger rental homes because my 3000 + unit comes up in January and the rates on 3000+ here appear to have surged even more over the last year. So it looks safe to tack on at least another 3% increase, which is the minimum I try to increase each cycle. This particular unit has had effectively no vacancy time (other than a day or two for cleaning) since 2009. Its currently on only its second tenant. We will see in January if the current tenant renews for year 4, but whatever happens I am not worried that it won’t be rented and at a premium rental rate.

      Again, your specific facts and circumstances are the key.

  5. What do y’all think about a house with no dining room. The family converted the dining room to a 4th bedroom. Then they enlarged the kitchen’s bar stool counter to a large granite countertop that is large enough for 4 people. We’re purchasing it next month with the belief that it will rent, but down the line if we want to sell, we’ll convert it back to 3 bedrooms. The price we are paying takes this into account.

  6. Lisa Roebuck

    Hi Andrew,

    I enjoyed this article, very informative. I have enjoyed reading and learning from your other articles, too. Thank you for writing and sharing your knowledge!

    One of our rental houses has 4 bedrooms, 2 baths, 1,729 sf. Everything is good except the 3 bedrooms are a little too small so we had to lower the rent and it took 2.5 months to rent it out after we remodeled it two years ago. The 3 bedrooms are probably a little less 10 feet x 10 feet.

    You indicated that you find a house size of 800 – 1,500 s.f. is good for you. Is this figure for apartments too, or just SFR?

  7. Kathleen Leary

    Location, location . . . . in this town, probably half the homes are 100+ years old & many, many of them are 2 bedroom/1 bath. The rental market is pretty strong here: a college, lots of seniors & young couples, plus a definite lack of apartment units.

    So for me, a 2/1 is pretty standard stuff. Obviously, the 3/2 is the “gold standard” for a rental SFR, but around here, 2/1 SFRs are an investment definitely worth having.

    I’ve also found that folks with a whole carload of kids tend to pass them up . . . . just sayin’.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php