Investment Deal Breakers: What Makes Me Say No to a Property
Over the last decade or so, I’ve invested in hundreds of properties in several different markets. I’ve learned a lot doing this, about investing, real estate, market trends, and even myself. I’ve figured out what works for me as an investor, and which properties align with my strategy and will bring me the most success – along with those that don’t.
These are a few factors that, no matter how much I like other aspects of the property, are absolute deal breakers for me.
There’s a lot you can change when you enter into a new investment. You can upgrade a property, you can boot out bad tenants – but the one thing you can’t change is its location. One of the first things I do when considering a new investment is take an inventory of the location stats. Crime rate is a big one I look at, because this will tell you a lot about your tenant pool. High crime areas tend to attract the lowest quality tenants, and that’s a stressor I don’t want to deal with. I also look at what’s going on in the surrounding area. If there’s a landfill or a sewage treatment plant nearby, I’m going to pass. That property will be more difficult to rent, because nobody wants to live in a place that reeks 24/7. Same goes for buying property in a heavy industrial area; these homes may be harder to find tenants for. Lastly, I check to make sure the property isn’t located in a flood zone. The cost of flood insurance can completely wipe out cash flow, so I typically avoid these homes.
Structural Problems & Other Repairs
Another potential deal breaker for me are structural problems or other major repairs. I don’t mind buying a house in need of renovation – in fact, I do it all the time. But what makes me shy away is the house with the foundation issues, the mold problem, or the unpermitted additions. All of these equate to major expenses to repair or mitigate, and it’s not usually worth it in the long run. Plus, these homes often have other issues that must be addressed as well, driving up the cost even more. When you’re presented with a property that’s going to require tens of thousands of dollars to make it habitable, it’s probably not worth the investment.
The sellers themselves can also be a problem. I’ve encountered every type of seller you can imagine – the ones who don’t really want to move, so they hang on for the right buyer/price; the ones who want a quick deal so they can get the heck out; the honest ones and the dishonest ones. The list goes on and on. One type of seller I won’t work with, though, is the stubborn one. This is the person who is unwilling to negotiate on the property, and refuses to budge on price or repairs. Basically, they won’t compromise. And anyone who knows anything about business, whether it’s real estate or a corporate merger, knows that compromise is at the center of every deal.
Finally, and perhaps most importantly, we have the numbers. Every single investment must be met with a list of various calculations that will help determine if it’s a solid deal or not. Rent/cost, net operating income, cap rate, cash on cash return – these are just a few of the figures you’ll need. The bottom line is always the most important thing. A property must have positive cash flow, and performing these calculations will give an idea of whether that’s going to happen or not. If the numbers don’t add up, I don’t buy. Period.
These are a few of the things that will send me running from a property. Every investor has their own list of deal breakers, but this is mine. If I encounter any of these issues in a potential property, 99.9 percent of the time I’ll move along until I find a property that I am confident will produce the cash flow I want.