Real estate investing is a highly customizable, bespoke experience for investors. In many ways, you can choose how active or passive to be and what level of challenge and risk is acceptable for you.
This freedom is enormously beneficial but comes with dangers, too. Freedom, particularly in the hands of the inexperienced investor, creates a lot of potential pitfalls.
From the outset, you can avoid some of the biggest, most troublesome issues by simply targeting the right kinds of investment properties…and avoiding the duds.
5 Types of Investment Properties to Avoid
1. Weird Properties
Looking for a personal residence and an investment property are two different beasts. While you as a homeowner might want something utterly unique and eclectic, you don’t want to target the same traits in an investment property. Properties with wonky layouts, unconventional color schemes, and “unique” features are to be avoided. While you might find these features charming, it’s all a matter of taste.
Real estate investors want to attract a wide pool of potential residents (and perhaps buyers down the road). You’ll turn a lot of potentially great rental residents away if your property is weird in form and function. You’re not looking for an “exciting” rental property. You’re looking for one that functions well and generates wealth.
2. Especially Old Properties
Rehab is an essential step in real estate investment. Most of us go into this expecting to need to do some repairs and updating. It makes some of a property’s flaws easier to swallow – plus, a flawed property in need of TLC means you can better negotiate an amicable price.
It’s true that some flippers will target absolutely dismal properties in order to turn a profit, but these properties are a lot of work. The average real estate investor generally wants to avoid particularly old or damaged properties for a few reasons:
Code Violations – Older properties are more likely to fall outside of modern building codes, whether it’s bad wiring or the height of a staircase. Code violations must be fixed to do any kind of renovation, and you might not have budgeted for the trouble.
Dangerous Materials – We all know that old houses are more likely to contain dangers like asbestos. In the rehab process, you’re more likely to encounter and have to solve these problems, which can grow expensive very, very quickly. That’s not to mention outdated building methods that could leave you with higher energy costs due to poor insulation and energy efficiency, on top of the potential for poor or outdated wiring jobs.
Outdated Conventions – If you’re reaching back to the early 1900s for properties, you’re likely to encounter some layout choices that just don’t make sense for modern families. For example, closet space was, at one time, a very low priority. While you may be able to steal some square footage for a better storage situation, these smaller homes are easily cramped and not always workable.
Historical Designations – Avoid investing in historical or otherwise protected homes. That old Victorian might be gorgeous, but you are not only looking at steeper maintenance and upkeep costs, but you could face issues if the property is designated as historical. Owners must adhere to strict rehab guidelines that can be much more costly than a conventional property.
3. Cheap Properties
We’ve discussed the investor’s need to avoid cheap properties before. It seems counterintuitive, as logic dictates that a lower property cost gives you more room to turn a profit. That can work for flips, if you’re highly experienced and prepared to deal with unexpected costs, but the price of the property doesn’t solely relate to its physical condition.
Cheap properties can also indicate bad locations. It can be bad in a sense of being inconvenient to local amenities or bad in the sense of neighborhood and surroundings. It is always unwise to over-renovate a property relative to its neighborhood, and if you start cheap, you’re going to end cheap, too.
While there is certainly a need for lower-income housing in the U.S., it opens investors to huge risks. Cheaper properties attract lower-income individuals who may not be as financially stable as someone close to the median income. That means you’re more likely to run into missed, late, and partial rent payments – plus, resident turnover.
If a property’s price seems too good to be true, it probably is.
4. Shoehorned Properties
What is a “shoehorned” investment property? Simply put, it’s a property that doesn’t work for your portfolio. Too often, particularly in a competitive homebuying market, we settle for what we can get rather than what we need. When you shoehorn a property into your portfolio, you contend with numbers that don’t quite work and cash flow that isn’t completely secure. First and foremost, you must make sure the numbers work. No fitting square pegs into round holes.
5. Passion Project Properties
Don’t fall in love with investment properties, period. It’s just a recipe for disaster. Save passion projects for personal residences. Love of a property can blind you to its flaws. It will tempt you to fudge or rationalize bad numbers. Fall in love with building long-term wealth. Not with the properties that get you there.
Avoid the hassle of searching for the perfect investment property on your own. Your REI Nation advisor can help you choose a hand-picked property perfect for your portfolio!