In general, investing in real estate is a good move. Unlike investing in the stock market, which only pays you once you sell your stocks, you can reap the rewards of an investment property as it remains in your hands. You can also take steps to ensure your home will increase in value, while other investments, such as putting your money into mutual funds or playing the stock market, may be riskier.
Unfortunately, though, real-estate investment isn’t foolproof. There are some pros and cons to consider before you dive in, of course, but it’s especially important to evaluate the situation and the property you’re about to buy. Is it worth it? Here’s how to decide if it’s not.
Signs you may be making a bad investment
1. The Sales Team Is Too Pushy.
It’s a salesperson’s job to sell to you, so don’t disregard everyone who seems keen to make a deal with you. But you will probably have a suspicious feeling if the realtor or broker is overly pushy. Listen to that instinct.
Of course, a realtor has plenty to gain if you purchase the property that’s in their hands. But they might be trying extra hard because they know it’s a tough sell and all of the reasons why, some of which you might not see. Before purchasing anything, always make sure you’ve covered your bases, and have the place fully inspected before agreeing to sign anything.
2. The Location Isn’t Great.
You’ve heard it before, but it’s worth repeating now: Buying the right home is all about location, location, location. No matter how great the property itself is, you have to consider the area around it. Is it in the middle of nowhere? Will it incur an extra-long commute for its future residents? Are there any schools or buses in the vicinity? These types of considerations will help you realize if you can make money off of your investment — or if it’ll end up as a drain.
Just as you would when you're considering a rental, look beyond the nearby businesses to ensure you’re choosing the right property. Another factor to consider includes how well your neighbors and other tenants keep up their properties, which will affect the value and desirability of the neighborhood. Check crime rates, the year-to-year value of homes, and the amount of change and upgrades coming to the area as well.
3. The Property’s Been on the Real Estate Market Forever.
Forever might be an overstatement, but a house that’s been for sale for half a year or more should raise your eyebrows. There’s no way you’re the first person to discover it — others checked it out and felt that it was a bad investment, or else it’d be off the real estate market. It’s up to you to figure out why.
Consider other factors that can impact the sale of the home. Properties tend to sit on the market if they’re less-than-attractive from the outside. An outdated interior also turns off buyers, as does a lot of clutter. These are things you can look past as an investor, though. Maybe you plan to make changes to increase the property worth, and these necessary changes would play into your hand.
What you don’t want are unexpected, expensive changes to crop up, and maybe that’s what is lingering if the property’s still on the market. The best course of action is to do your research and go with your gut.
4. There are Tax-Based Impositions.
A new property will change the amount of money you owe the government at that time of year. You might be making more in the long run with the help of your investment, but always double-check the property taxes you’ll owe by adding another home to your register.
“For tax purposes, the investor should have his or her accountant determine whether the investor will be able to deduct any projected losses or the tax effect of being allocated any profit with or without a corresponding distribution of cash to pay any tax on such profit,” according to Thomas Collura, an attorney at Hodgson Russ, which specializes in the area of business and personal tax.
Collura also suggested that buyers remain aware of any impending economic forecasts that might affect the value of the property. If you predict a hike in property taxes, for example, it might not be the best time to buy.
Familiarizing yourself with all of your tax-related requirements and rights is a vital part of investing properly — and saving yourself from any unexpected government payback in the future.
“Investors are typically focused upon the income tax consequences of the investment, but should also recognize that the investment may be included in the investor’s estate for estate tax purposes,” Collura said. Awareness can make all the difference.
6. The Seller Is Holding Back.
In most real estate transactions, a buyer will have the right to send an inspector into a home to ensure everything’s in working order before signing on the dotted line. This process might uncover questionable electric wiring, broken appliances, a soggy roof, and more, which the buyer will have to fix or pay for before making a deal.
With all that said, you can probably guess why it’s a bad sign if the seller won’t allow you to have an inspection or is otherwise holding information from you. Chances are, they know that there are problems that would stall or negate the deal, and they don’t want you to find out. This type of behavior should make it easy for you to walk away from a bad investment.
7. There’s Too Much to Do.
Most people who purchase investment properties do so with the intention of fixing the place up. It's a long-term investment, after all, so you want to make it both valuable and homey. You can do a lot of renovations to add value to the home such as updating the kitchen, revamping the bathroom or adding new rooms to the layout to rake in big resale bucks. These to-dos aren’t daunting — instead, they’re exciting and easy to complete, even if they take time.
Just be aware of the fact that there’s a fine line between investment property and a money pit. Some places need too much work to make them livable. Even if you’re willing to put in a lot of effort, you still might find the cost to do it all is much less than the value of the home when you resell it.
8. The Numbers Are Off.
If you're choosing to invest in real estate — whether you're buying a home to live in or rent out to others or commercial real estate — chances are, you’re familiar with the neighborhood in which you’re buying. That means you know how much homes tend to cost. If the price tag on the place you’re considering doesn’t match, you should try and figure out why. There might be an underlying issue that warrants a below-market price tag.
As much as this goes without saying, you should always consider your own finances, too. Make sure you have enough equity to buy the home and renovate it as necessary, as well as a stable cash flow, because you will have home-related expenses in the future. Factor in your holding costs and any potential selling costs should you need an exit plan to sell before you lose any more cash. This is most likely going to be your largest asset, so it's important to go the extra mile to ensure that it's worth it.
You should know the most you could get for your home in comparison to others in the neighborhood. Check out recent sale prices for upgraded homes with the same number of bedrooms and bathrooms. If the cost of your home plus the amount of money you’ll spend on renovations is higher than your potential sale price, you won’t make a return on your investment.
9. You Have a Bad Feeling.
You might not be an expert in the field of real estate by any means. You might have experienced real estate investors and salespeople in your ear, assuaging your fears and promising you the property is in tip-top shape. You might feel as though your feelings have no place in business; you're not a professional real estate investor, after all. But your instincts are slightly different sensations — and you should listen to them.
You’ll have all of the cold, hard facts collected and in front of you since you now know how to do your due diligence before you sign anything. But even with all signs pointing to “yes,” you might feel uneasy. Be a savvy real estate investor, and listen to this feeling, because you’ll end up regretting it later when you find yourself in the midst of an expensive renovation or unable to rent your investment property to tenants.
It’s vital that you decipher your pre-purchase jitters from trepidation, too, since an investment of this scope will always cause you to feel a bit nervous (it's about to become your biggest financial asset, after all). But if something’s telling you to step away and keep looking, there’s nothing wrong with doing that. You don't want to bet a large sum of money on something that you don’t truly believe in.
Do Your Homework
Investing in real estate can be an exciting move. It's a big change from a rental property, and not only do you have a home of your very own, but you're making a long-term investment for your future.
However, as with all investments, you need to be careful when you invest in real estate. While it can be a great investment, it's important to be aware of the risks and drawbacks. By doing your homework and following your instincts, you can all but ensure the place you’re buying will be the perfect addition to your portfolio for years to come.