“Money pit” is a term used to describe an investment that requires a lot of money without offering much return. It’s important for investors to avoid money pits at all costs, but they can sometimes be hard to identify. Even the best investors can invest in the wrong property and end up in mounds of debt. A property could seem perfect initially but have hidden issues.
Table of Contents - How to Recognize (and Avoid) a Money Pit
As always, a good investor will do plenty of research on a property and its surrounding area before making a purchase. This will help prevent spending tons of money on an investment that won’t generate any profit. Having a good property inspector and real estate agent on your side is always a great help as well.
To avoid falling into a money pit, it’s important to watch for certain signs. It’s never a good sign if a beautiful piece of property has been on the market for a long time, for example. Low asking prices and the need for many repairs are also common signs of a bad investment. Learn more about the signs that signal a bad investment before starting your search.
Take a hard look at the neighbourhood
No matter how beautiful the home is, it’s difficult to sell a property located in a non-desirable neighbourhood. Many potential buyers prefer areas with nearby amenities like parks, schools and grocery stores. People with families especially want to avoid areas with high crime rates.
Since having plenty of knowledge about an area is essential before purchasing property, many investors choose to only invest locally. Investing locally usually makes it easier to avoid bad neighbourhoods. If you’re investing in a property that’s not near where you live, however, it’s even more important to research.
It’s usually easy to check neighbourhood statistics with an internet search. Local real estate agents can point you in the right direction of desirable neighbourhoods. When researching a neighbourhood, be sure to look at crime statistics and how property value in the area has fluctuated through the years. You should probably also visit the neighbourhood for yourself, even if you live far away. This will allow you to get a good feel for the neighbourhood, making it easier to decide if it’s the right place for an investment.
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Consider the asking price
A property’s asking price can tell you a lot about it. If the asking price is extremely high, the seller might be trying to cheat you out of a lot of cash. The neighbourhood could also be highly desirable, in which case the high asking price is reasonable.
Properties with abnormally low asking prices may need abundant repairs. If you end up putting all your money into repairing and renovating the property, profits may be minimal, even if you sell it at a good price.
Properties with low asking prices might also signal that they’re located in an undesirable area. This is especially true if the property is seemingly in good shape. If you’re suspicious about a property’s asking price, be sure to do plenty of research and consider speaking with a local real estate agent.
Research how long it’s been on the market
As noted, properties that have been on the market for too long often signal an issue. Before jumping the gun on any piece of property, be sure to check how long the owner has tried to sell it. If it has been on the market for a long time, consider asking the seller for a reason behind this. Sometimes, it’s simply an issue of bad marketing. Approach with caution, however—there may be more to the story.
Have a professional inspect the property
One of the best ways to avoid falling into a money pit is to have any property you’re considering thoroughly inspected. This will help you catch any issues that the seller hasn’t mentioned. It’s easy to miss certain things when inspecting on your own. Bad foundations, worn-out pipes and similar issues are often missed by those without experience in home inspections.
A good inspection will show the need for any repairs and renovations on a piece of property, which in turn will help you plan a realistic budget. This will also help you decide if the property is worth fixing for resale.
Some people avoid home inspections in order to save money. A good home inspection will likely end up saving you money in the long run, though. As always, find an experienced, licensed and well-reviewed inspector. Consider asking other local investors if they have any recommendations.
It’s usually a good idea to call several home inspectors in the area and compare estimates. You might also want to take a look at each company’s reviews, though these reviews should always be taken with a grain of salt. Look for overall patterns (good and bad) in the reviews.
Decide if the property is worth it
Even if a property needs plenty of repairs and renovations, you might think it’s worth the price. There are many things to consider before making that leap, though. Do you have enough free time to schedule renovations and repairs? Buying a property for resale takes a lot of time and energy that many people can’t dedicate. If you skimp on these repairs and renovations, you’ll end up making less money on your investment than you’d hoped. Sometimes, it’s better to wait on a property in better shape that has a slightly higher asking price.
If you’re a new investor, the idea of investing in a money pit is terrifying. It shouldn’t stop you from chasing your investment goals, though. There are plenty of ways to avoid money pits as long as you have time and the desire to make high profits.
Doing research on any property you’re considering is essential. It’s also a good idea to speak with local real estate agents and other investors for their opinions. Utilize all your resources and you’re sure to make the right decision about an investment—that way, it will be easy to avoid money pits.
Six additional ways to avoid a money pit
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