3 Reasons I Pass on a Real Estate Investment Opportunity
It can be challenging at times to know when to put an offer on a property and when to pass. One obvious reason to pass is when the numbers don’t make sense. By this I mean the price is so high that either you won’t be able to rent it for enough to cover your financing and operating expenses or the asking price plus renovation costs are above the appraised value and you don’t want to bring the extra funds to closing to make up the difference.
However, financials aren’t the only clues when deciding on whether to buy. There are other subtler things I look for when hunting for new properties.
Choppy Interior Layout: Buyers and tenants want open floor plans even in smaller units. The typical single-family home I invest in is around 900 square feet. There isn’t much room to waste in this tight space. If there are too many walls creating a choppy floor plan, you could be looking at using a significant portion of your rehab budget to reconfigure the floor plan. I’m sure there are flippers out there who aren’t concerned about this, but with asking prices on the rise, I have to keep my rehab budget in check to keep it profitable to hold as a rental.
When you walk into the listing, is it so chopped up you can’t imagine how anyone would even get a couch or a chair in the living room? Or have you walked into a “bedroom” and wondered if a bed would even be able to lie flat? You know you’ve seen it. That bathroom where you can brush your teeth, shave your legs, and go to the bathroom at the same time. A choppy layout and cramped room are not going to be enjoyable to live in. I’m not saying that the rental has to be like a Joanna Gaines open-concept house, but if you couldn’t imagine living there, and your budget doesn’t support changing it, others won’t be able to live there either.
High Asking Price + Deferred Maintenance: If a property hasn’t been taken care of, most of your renovation budget will be spent tending to repairs instead of adding features that will increase rent. Now more than ever, I am seeing properties being sold “as is” but with asking prices as if they were turnkey. Demand is high and sellers know that they can get a high sales price without having to fix anything. I most often see properties that need foundation repairs, a new AC unit or furnace, or a new roof. Tending to these repairs is important for maintaining the value of the asset, but tenants don’t really care that much about these items. They expect to have a roof that doesn’t leak, a heater that works, and a foundation that doesn’t cave in. Rarely would they pay a premium for those improvements.
I have purchased properties where the seller has taken care of the foundation repairs and I have purchased units where I repaired the foundation after close. The repair itself isn’t the point. The point is that if the asking price is high, yet I will have to spend a good chunk of my rehab budget on items that won’t demand increased rent, I walk away. I have placed offers on properties I have had to walk away from because the foundation was so bad and the layout was unworkable, my budget would have been over $30,000 on those two items alone. There isn’t much margin when you are paying high prices out of the gate. If you were buying something above market value and you’re needing to drive up rent to make the monthly cash flow numbers work, you must be mindful of balancing your renovation budget between repairs, improvements, and features tenants will pay extra for.
Funky Lot Layout: Another aspect that will drive me away from a property is the overall layout of the lot. As an example, I won’t invest on busy streets because I think pulling in and out of the driveway would be too cumbersome, accident-prone and generally too noisy. I know that sounds really picky, but if I can’t imagine living there, why would I think someone else would? I also stay away from floodplains. I put an offer on a top/bottom duplex that had a large unfinished basement. I needed to convert the basement to a 3rd unit to make the cash flow work. It was going to be an attractive property and was in a neighborhood adjacent to a very popular entertainment district; however, the property was in a floodplain. I couldn’t imagine putting in a below-grade basement unit on a property in a floodplain. Some of you may choose to do it anyway and think I’m crazy for passing it up. But this is my blog and this is my opinion!
Another characteristic that I try to avoid is where the garage is underneath the property with a downward-sloping drive. To me this is a water hazard that will invite flooding or a driving hazard when we get ice storms. We get periods of heavy rain in Kansas City and I don’t want the headache of dealing with tenants calling because they have standing water in their garage and can’t access their cars. I also don’t want to have on my conscious that I have tenants that are having to deal with that turmoil of getting their cars out of the driveway because it is covered in ice. My goal is to minimize the chances for headaches on a property, so when I see characteristics that may increase that possibility I move on.
None of the areas I listed above may cause you any concern. Maybe you welcome the challenges introduced by some of these scenarios. That’s for you to decide and to deal with. Me on the other hand, I don’t want to introduce unnecessary stress in my life. I’m not “investing at all costs” for the sake of growth. I am intentionally selective about the properties I purchase. I’m not afraid to pass on an opportunity if it doesn’t feel right, even if the numbers show otherwise. Sometimes you have to go with your gut and listen to your instincts on what long-term ownership and management of the property could be like.