Rental Property Warning Signs
By JD Esajian on January 25, 2019
Not every property makes a great rental property.
With the prolonged increase in rental property demand it is easy to assume you can simply rent any property you have a tough time selling. While this works more often than not, there are times this plan will backfire. As much as demand can work in your favor, it can also work against you. Renters have more options today than ever before. If your property is in a poor location, lacks enough storage or has a funky layout they can drive down the road and find another rental property. Instead of having multiple tenants to choose from, you will be left to deal with a vacancy or consider a major rent reduction. Fortunately, you can avoid these situations by not ignoring the warning signs that are usually right in front of you. Here are five rental property red flags you should never ignore.
- Poor Demographics. With any property you need to always consider the exit strategy. There will be times you are presented with an offer too good to be true, but you see enough value to pursue it anyway. It is only when you decide to sell, or rent, do you realize you may have made a mistake. The first red flag item to consider are poor demographics. Renters want to feel like they are home, even if housing is only temporary. Nobody wants to live in an area infested with crime, high unemployment, poor schools and a struggling economy. Even if they do, you will have to greatly reduce your rent to make your unit appealing. Always look at the local demographics before investing in the property. Drive by the property at different times of the day, and night, just to gauge the activity. If you wouldn’t feel safe in the area, there is a good chance your potential tenants wouldn’t either.
- 1-2 Bedrooms. A common theme throughout the rest of this post will be rentability. Simply put, how much appeal does your unit hold? A single-family home with only one or two bedrooms doesn’t move the needle that much in either direction. It is most likely too big for a single individual and too small for a family. You are stuck in limbo and will have a hard time finding tenants. It is simplistic to say that you can add a bedroom somewhere or convert a room into a useable living space. By doing this you are basically robbing Peter to pay Paul and can actually reduce the appeal of your property. As much of a discount as you may be getting, it doesn’t do you much good in the long run. You will still struggle marketing the property and have a tough time finding tenants. You are better off paying more for a three-bedroom house and renting to a small family.
- Too Much Space. In real estate, more isn’t always better. On the surface, it may seem that a huge house with thousands of square footage will fly off the market to renters. However, you need to ask yourself why a renter would pay the same in rent as they would for a mortgage. They may have a lack of down payment funds, but generally speaking high end rentals only work in niche markets. Areas 30 minutes away from major cities may work for this, but there are only a handful of these places throughout the country. For every other market a high-end property will have a tough time finding a tenant. You may get lucky with an out of state employee on a short-term contract, but who wants to deal with the pressure of finding these tenants every lease. Additionally, bigger homes mean increased utility bills and higher maintenance fees. Bigger doesn’t mean better when it comes to rental properties.
- Too Rural. One of the arguments investors often make is to estimate value if a property was thirty miles away. This is good in theory, but the property is not in the middle of town, it is in fact ten minutes from the closest supermarket. It should go without saying, but this changes everything. A property located in a rural market requires a niche renter that may not be abundant in your area. Sure, it is nice to visit this area on the weekend or shop at the farmers market on Sunday morning, but it may not be a desired place to live year-round. There is a reason you are getting such a good deal on the property. The demand is low, and you will struggle finding tenants, and when you sell eventually a buyer.
- Lack of Storage. A property may check all the boxes, but if the storage is poor you will have a hard time finding tenants. Renters know they are not going to live in your property forever. While they bide their time, they want a place where they can store all their belongings. At a minimum, the property must have closet space, an attic or a basement where they can park their stuff. If there is a garage, you need to make sure it is empty and functional. Without storage the tenant will be forced to cram all their items in the space provided or use one of the rooms strictly for storage. This makes the property smaller, and ultimately less functional.
Before jumping at a new property, you need to take a step back and look for any red flags. The right rental property can enhance your portfolio, but the wrong property can be a burden that is difficult to get out of.