Are you the type to avoid confrontation? Do you let things that bug you just happen and proceed? Well my friend, if that is you then you are a prime time target for buying real estate that is no good for you. There are countless stories out there of failed real estate investors and the reason I think they all failed? Is because they made bad mistakes, they did not walk away when they should have or they did not have enough cash reserves to handle the down times.
When purchasing a rental property, it is vital that you have a set criteria before you start the hunt and even more important to actually stick with it. I know how it is trust me, you see a property you like, you fall in love with it, it’s a perfect investment but the numbers are just not there. So you start fudging the numbers a bit, lowering the vacancy a tad bit, lowering the maintenance costs and boom! All of a sudden, your future rental property is hitting your numbers just the way you want it to.
DO NOT DO THIS!! You were just a victim of emotion based real estate purchasing. Emotion based real estate purchasing is when you have an emotional tie to a property because of a certain attribute. This attribute can be anything, a specific part of town, a certain type of room it has, a certain year it was built, it can go on and on. The problem is that when this happens you will be more inclined to make a bad investment decision.
Do not ever purchase an investment property without having BUSINESS as the main priority. You have to treat any investment property as a business and nothing else in order to succeed. This is exactly how I have bought all my houses and is exactly how I will continue to purchase future investment properties. No heart in the game, only my brain! I will not ever modify my calculations based on an emotional tie I have to a property and you should not either.
Today I will share with you the top 5 reasons to back out from buying a turnkey rental property. These are big time red flags and if you come across one, even if you are already under contract, you should be very hesitant with purchasing and walk away if you need to. I personally have had to walk away from a few of them already and have lost money by paying for inspections or appraisals. But you know what?! That is okay with me, I would rather lose a few hundred bucks now then thousands later down the road. It’s an executive decision that needs to be made sometimes and if losing some money comes with it, then so be it. Sometimes you need to sacrifice a few bucks, to save thousands!
It is very important to do your due diligence on a property before you purchase it. Be sure to have a set criteria in mind when you are looking for a new rental property. Your criteria may differ from mine and this is just fine but be sure you actually stick with it. If you come across any of these reasons below. You should consider searching for a new rental property.
Reasons to walk away from a rental property BEFORE being under contract to purchase.
1) High Crime
- This is probably the very first check I do when analyzing a new potential rental property. If the house is located in a high crime area, I will without a doubt proceed to the next one. I have zero interest in having an investment property in a bad area. Bad areas equal bad tenants. Bad tenants equal no payments. No payments equals no cash flow! See what I mean? These are the steps I follow to check crime statistics.
2) Seller advertises rents higher than market rent.
- This is the second check I do when doing my due diligence on a rental property. The seller of your new potential rental property will advertise X amount of rent that the rental property will have. It is in your best interest to confirm these findings for yourself. There are many scrupulous sellers out there who will advertise a rent higher than market rent, put in a really bad quality tenant at this high price which will lead to disaster. What most likely will happen is the bad tenant will stop paying rent, you will evict this tenant, tenant will destroy the house and then you are left with huge repair bills and when all is said and done, your new tenant will be paying less rent then you originally had. It’s best to avoid this scenario. Be sure to check the market rents, if what you find is not what is advertised, now would be a great time to walk away.
3) The numbers don’t work
- If you do not have an awesome calculator for analyzing properties, it is time to get one. If you subscribe to my blog, you will get access to a free rental property calculator. It is the same one I use and I love it to death! When analyzing a rental property, be sure to input all figures as accurate as possible. If it is not difficult to get actual numbers and it is best to see your calculations as close to real as possible. I personally will not purchase a new rental property if my cash on cash return is not 15% or more. So far, i have been averaging over 20% returns on all my turnkey rentals but that is because I have been super picky about the properties I buy. There have been times when I want to fudge the numbers a bit as I discussed above so I can see 15% returns on my calculator. This my friend is not a good thing to do. When you start doing this, think about what you’re doing and highly debate if now is the right time to start looking for a new rental property.
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Reasons to walk away from a rental property AFTER being under contract to purchase.
4) Major Inspection Issues
- The first thing you should do AFTER going under contract/purchase agreement with a new rental property is to order the Inspection. The inspection can make or break a deal depending on how it comes out and what the seller is willing to fix from the list. If the inspection has multiple major issues and the seller is not willing to fix some of them, it is then up to you to make a decision on if you are ready to walk away. The best option here is to re-run your numbers with the new repair costs out of your own pocket and see if the calculations still work for you. If not, walk away! Yes you will lose your inspection money but its better to lose $300 then thousands down the road.
5) Appraisal is lower than purchase price
- If you are a real estate investor then you know it is a very good strategy to buy below retail value. If you are purchasing a turnkey rental property and the numbers are good for cash flow, then it is okay to buy just at retail value but you do not ever want to buy over market value. No matter what! If an appraisal comes in lower, its time to fly the coupe on this baby and look for another one. There are plenty of other houses out there and there is no need to pay extra. Walk away!
These are all reasons I personally would choose to walk away from a potential rental property. If you avoid these issues, your chances of success are much higher. If you want to be in the buy and hold real estate game, it is best to minimize risk as much as possible by avoiding any potential pitfalls up front.
Can you think of any other reasons why you would choose to walk away from purchasing a new rental property?
Can you explain (5) for me in greater detail? I’m clearly not understanding it. Wouldn’t a higher appraisal mean you’re getting a “deal”? Or does that negatively affect the taxes you’d be paying? Thank you in advance.
Hey Joel! Way to catch that! You are absolutely correct, I meant to say lower. Fixing now. A higher appraisal would be great!
Ok, cool, thanks for the quick reply.
I am planning to invest in turnkey properties next year.
I will use this statistics in deciding to go or not to the investment :).
Great! Yes you should definitely utilize this. It could save you a lot of future headaches. Feel free to reach out to me next year when you are purchasing. I would be more then happy to help out, make recommendations or answer questions for you.
In Florida, we have high HOA fees each month so that is something I would always consider when investing in rental property.
HOA is one thing I would definitely try to avoid too. Especially if it is high. Just eats up cash flow. Good call!
Hi, I would add property management. Often turnkey properties have a property manager or part of a rental pool. If they don’t manage the properties properly, hustle to get your property rented, fix things on time, make your tenants happy, then it starts eating your cashflow. So who manages your property is vital. Interview the management firms, check their history, see how long they have been in operation.
You are right on the money. A PM can make or break you “AFTER” the purchase. This list is for red flags before buying during the purchase process.
Thanks so much for the comment and great tip on the PM.