Investing Basics

How to Spot a Money Pit: 5 Telltale Signs of a Bad Investment Waiting to Happen

How to Spot a Money Pit 5 Telltale Signs of a Bad Investment Waiting to Happen
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Most people have heard horror stories of promising investment endeavours gone wrong. From dishonest property listings to sudden market fluctuations, there are a variety of circumstances that can complicate a real estate investment deal and leave investors at a loss.

Table of Contents - How to Spot a Money Pit: 5 Telltale Signs of a Bad Investment Waiting to Happen

Nobody wants to deal with the fallout after a bad real estate investment, so you must do everything you can to minimize your risk and identify properties likely to let you down. Several signs can clue you in on potentially bad real estate investments.

The property has been on the market for a long time

Consider the amount of time a listing has been up before you decide whether to purchase it. If a property has been on the market for many months or years, there’s likely a reason!

While it’s possible for a property to simply evade the attention of other prospective buyers and investors, this isn’t the most likely explanation of a listing that’s been up for a long time. If it seems like there’s no interest in a given property, it’s a red flag there isn’t sufficient market demand for that type of investment. Or worse, there’s something fundamentally wrong with the property itself that would reduce its profitability!

The area isn’t desirable

Location is essential when it comes to the profitability of a real estate investment. You shouldn’t just consider the specifications of a property and all of the onsite features and amenities. Consider the greater location and what it has to offer to prospective renters or buyers.

Avoid neighbourhoods with scant resources or high crime rates and opt for areas with great schools, high walkability, quality transportation options and fun attractions or retail spots. Without any of these elements, you are unlikely to generate interest from renters or buyers—even if your property offers an extensive list of great interior features and onsite amenities.

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The asking price is suspiciously low

If an investment opportunity seems like it’s too good to be true, it probably is. An asking price that’s suspiciously low is a major red flag, indicating something shady about the deal. In many cases, a seller might set a price low to attract a buyer as quickly as possible and conceal issues with the property until after the sale has processed.

Whatever the reason for a low asking price, you should never jump on one of these offers without doing your research first. Don’t make impulsive decisions when it comes to real estate investing just to secure a low price for a property. Instead, take your time and weigh your options so you can make the best choice possible with your money.

There are lots of major repair demands

There’s nothing wrong with investing in a fixer-upper property, but you shouldn’t take on too many repair issues when you invest in real estate. Investing in a property that has major issues like a cracked foundation, falling roof, water damage and other big problems is a major risk.

The amount of money it takes to repair these things can be far higher than you anticipate and you may be left with repair bills that are higher than what you can sell the updated property for. Chances are, you will find more and more problems as you start to work on your home and these costs will only rise over time.

The investment doesn’t align with your desired numbers

Flexibility is an important characteristic for real estate investors to have, but you should always stay true to your standards when you’re making an investment decision. If you have particular numbers and parameters in mind, don’t stray too far from them. It’s better to pass up on an investment opportunity that doesn’t align with your goals than to accept a less-than-ideal deal.

Shrewd real estate investing is about more than just identifying the positive aspects of a property or opportunity, it’s about acknowledging red flags and knowing when to say no. Keeping all of these signs of a bad investment in mind when you’re considering your real estate options will help you sift through listings and avoid wasting your time on investments that won’t help you achieve your goals.

When the time comes to sign on the dotted line for a new property, ask yourself if you feel confident. If not, it’s likely because one of these red flags is present!

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