When you put your hard-earned money into anything, you hope against hope that your investment will pay off. That goes double for real estate investors, who often have to devote themselves to long-term goals when committing to a real estate project. Watching your money dwindle to nothing in the aftermath of a poorly thought-out investment (especially when it plays out over a long period of time) is one of the worst sensations an investor can experience.
Table of Contents - How to Tell if a Real Estate Market Is a Bad Investment
Fortunately, some telltale signs can help determine if your next real estate investment holds the promise of boom or bust. Here’s what to look out for.
ROI above all
Remember that every investment you make has one underlying goal: the return. That is, how much money are you expecting over and above your initial investment? The return on your investment is the single most essential factor to keep in mind as you move through any investment. When you’re working specifically in the real estate market, several factors will conspire to eat away at your potential ROI. While there should be some wiggle room on your expectations (and those expectations should be realistic), you should also consider the impact on your ROI with every move you make.
That means you should keep in mind specific figures like the home’s equity, the amount of money you put down versus the overall value, the home’s adjusted value after repairs and several others. If any of these figures threaten your overall profit, then you should think long and hard about dedicating yourself to a particular real estate investment.
If you’re planning to go hands-on with your investment, your sense of safety is crucial. Planning a fix-and-flip? You’ll need to oversee maintenance and check in with your realtor on-site over the course of ownership. Want to play the landlord? You’re going to spend lots of time on the property making sure tenants are treating it properly. That’s to say nothing of the amount of time you’ll spend showing around prospective tenants.
In short, you should feel safe when you’re working on and around your potential rental property. If you visit the site once or twice and you’re not sure about the safety of the neighbourhood, hold out for something a little smarter.
Read the neighbourhood
Let’s say you’ve found a house that stokes your interest. Before you commit to a down payment, make sure to check out the rest of the neighbourhood to check for two critical factors:
- Does the property align with your needs? If you’re searching for a single-family residential property, you should check that the neighbourhood can support that. Check for local amenities like a large grocery store and nearby schools. Drive-by the property and check that other families are living in the area. Meanwhile, if you’re searching for a smart short-term rental, you’ll want to look for vacation-friendly spots like bars and music venues.
- How do the costs add up? Look for data on recent home sales in the area and determine if the sales price for the home is in line with what you can expect from the local real estate market.
If your potential property cannot satisfy what you want from your investment or it’s going to drain your budget more than you anticipated, it’s best to keep an eye out for better options.
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State of repair
The potential homebuyers who will pay good money for a broken house are few and far between. The same could be said for a possible short- or long-term renter. No one will want anything to do with a house that’s in a horrible state of repair. When you’re purchasing a fixer-upper, it’s crucial to factor in the costs of one of two plans. Either you’ll need to repair the home to market value, or you have to come to terms with the understanding that you’ll be taking a hit to your profit margin if you try to rent the property or sell it to someone willing to do the work.
If you’re concerned about the amount of money you will need to spend repairing your investment property, it might be best not to move forward. If you’re on the fence, a seasoned contractor can help you.
Keep in mind the state of repair goes both ways. It’s entirely possible to spend money on an investment property that’s too nice for the neighbourhood. Suppose the spot you’re considering has too many amenities (steam shower, excessive-tech installed, a pool, a spa, etc.). In that case, your property may be priced above what someone expecting to move into the neighbourhood can afford to spend.
How long has it been on the market?
When shopping around for your next investment project, make sure you determine how long it’s been on the market. If the property has been on the market for six months or longer, then you should seriously consider passing on the property. Even if you’re not sure why the property has been sitting stagnant — even if you search high and low and can’t find a thing — you should still consider other options.
There’s a reason no one is putting a down payment on the place.
A questionable history
This one is pretty rare, but everyone has seen a horror movie where someone dupe moves into a new home, only to discover there’s a vengeful spirit haunting the place because of something horrible that happened previously. While the whole ghost thing might be a stretch, it would be terrible to invest your money in a property that was marred by criminal history.
Before you dedicate thousands of dollars to a real estate investment, make sure that it’s got a clean history.
Trust your gut
When it comes down to it, you should believe in what your research and your instinct tell you. If you’re investigating a specific property, you shouldn’t ignore any red flags, and you shouldn’t be in too much of a rush to cover the due diligence. At the end of the day, your bank account will thank you for your prudence.
How To Know If a Property Is A Good Investment
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