High Alert! Watch Ouf for These RED FLAGS When Investing

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Buying a rental property above the appraised value. I’ve heard of so many investors over the last year that have purchased rental properties above the appraised value. Please never buy a property for more than it’s worth! You’re more likely to lose money on your investment, you’re losing out on equity, and you’re going to have a higher monthly payment. There should never be a reason to buy above appraised value; this is a major red flag!

Cash flow negative. A cash flow negative property generates less cash than it costs every month, meaning you’re actually losing money. The bare minimum you should be looking for is $100 in cash flow after all of your expenses are paid. But of course, more is always better. Buying a cash flow negative property can leave you vulnerable to a whole host of risks, not to mention stress! Being cash flow negative on an investment is not going to help you reach your goals and it will leave you in a panic month after month trying to pay your expenses. If you buy a cash flow negative property, you’re setting yourself up to lose.

Sky high appreciation. If you’re seeing crazy high appreciation on a rental property, or in a rental market, that’s another red flag. New investors sometimes make the mistake of thinking more appreciation is better, but that’s not always the case. A solid investment will have good appreciation, but at a slow and steady rate.

High vacancy rates. Stay away from any property, neighborhood, or city that has high vacancy rates. Even if you’re able to secure a great tenant from the get-go, chances are that eventually they’re going to move out of your property. Tenant turnovers are one of the biggest expenses for investors, and the last thing you want is a long vacancy to prolong the experience and eat into your returns.

Tenant friendly legislation. Trust me when I say that investing in a landlord friendly state is a critical piece of smart investing. If you’re considering investing in a state that doesn’t favor landlords, to me, that is a huge red flag. Legislation can impact everything from evictions to security deposits and late fees.