Bad deals in real estate are everywhere. And unfortunately, quite a few novice investors fall into their trap. Whether it’s a lack of due diligence or overinflated numbers from the seller, things can often go wrong. But thankfully, there are just as many good real estate deals out there waiting for investors. Here’s your full guide on how to avoid bad real estate deals.
Find the Right Neighborhood
Buying an investment property in a bad neighborhood is one of the worst things a real estate investor can do. As the old adage goes, real estate is all about location, location, location.
The worst neighborhoods will typically offer subpar occupancy rates, poor rent growth, and low appreciation. This all compounds to create an unfortunate situation for investors: you may struggle to find tenants, charge reasonable rental rates, or even resell the rental property for a profit. So don’t let low price tags fool you into thinking you’re automatically getting a good real estate deal!
Every real estate investor needs to study up on the neighborhood they plan to invest in. Because if you buy a rental property in a bad neighborhood, there’s not much that can salvage your investment. Consider using an advanced tool like the Mashvisor Heatmap Analysis Tool. This tool compounds information from a huge array of sources and provides investors with advanced analytics. The map-based presentation will quickly show you which neighborhoods have high occupancy rates, high rents, and a good average return on investment.
Investment properties don’t exist in a vacuum, and the real estate market trends within a neighborhood have a huge impact on the success of your investment. Performing your due diligence by studying the neighborhood is a great way to avoid bad real estate deals.
Related: Where to Find Neighborhood Data for Real Estate
Check Your Cash Flow
One thing that catches a lot of real estate investors by surprise is cash flow issues. If you end up with a bad rental property, your income might struggle to catch up with your expenses.
To avoid a bad real estate deal, make sure to study up on your cash flow before purchase. You’ll need to take an exhaustive look at every cent that has to be spent on the rental property to avoid any surprises. Thereafter, work on maximizing the avenues wherein the same property can generate income. If you can guarantee positive cash flow, you’re on the tail of a good real estate investment.
By using a real estate investment calculator, you can simplify this process quite a bit. Compile all of your expenses, such as mortgage interest, maintenance costs, upgrade costs, and others. If the calculator provides you with negative cash flow based on the rental income estimates, that’s one of the most blatant signs of a bad real estate deal. And the best real estate deals will provide investors with very high cash flow — and therefore a very high income.
Perform a Real Estate Return on Investment Analysis
A lot of beginner investors get into bad real estate deals because of one simple reason: not running the right numbers. When it comes to making an investment, properties for sale need to be evaluated very thoroughly. The worst investment property is one that provides a low return on investment.
Thankfully there’s a handful of powerful tools that can come to the rescue. By performing an investment property analysis, you can mitigate a lot of this risk. Mashvisor offers an advanced real estate investment calculator that crunches all of the numbers you need to make a successful property investment. It compounds the asking price with the amount of income it can generate to give you a holistic view of the return on investment you could be making. Because this tool makes research so easy, you could easily compare dozens of rental properties for sale to find one with a high return on investment. This is a fantastic way to avoid a bad real estate deal and guarantee that you’ll be making a good sum of money from the investment. The worst real estate deal is one that provides no or negative ROI.
Related: How to Do Investment Property Analysis
Know the Market Value
As a beginner real estate investor, there’s a good chance you fall into this trap: overpaying. There can often be quite a large rift between the listing price and market value, as a property seller may overestimate the value.
One of the best things you can do in this regard is to study your real estate comps. Comps are properties of similar specifications, and within a comparable region, that have sold in recent months. This data can go a long way to informing whether your selected property is overpriced. To avoid real estate deals gone bad, a real estate agent can be very helpful in these cases.
Conduct a Home Inspection
Hands down, the best way to avoid a bad real estate deal is to perform a home inspection. Without a proper inspection, there’s a real risk you may end up with a lemon investment property.
Inspections come in different forms and can vary in quality quite significantly depending on the provider and the selected services. In a majority of cases, home inspections will cover electrical wiring, plumbing, insulation, and a small handful of other features. This is already a great step towards avoiding a bad real estate deal. You may, however, want to go for a more holistic service. Basic inspections don’t typically cover things like asbestos, sprinkler systems, and additional facilities. You may, therefore, want to consider taking on additional inspections to guarantee that you don’t fall into a bad real estate deal and avoid losing money in real estate.
Related: The Ultimate Property Inspection Checklist for Real Estate Investors
Can You Get Out of a Real Estate Deal?
If you’ve gotten yourself in a bad real estate deal: fear not. Here’s how to get out of it.
Contingencies in real estate are clauses that you can agree upon with a property seller at the time of purchase, which can prohibit the transfer of liens. If one or more of these contingencies is violated, you have the right to back out of the deal.
In a majority of cases, you’ll be able to exit a bad real estate deal if the property does not pass a home inspection. Therefore, it is crucial that you start this process as soon as possible.
Finally, before negotiations wrap up, consider hiring a home appraiser. A real estate appraisal can be a great negotiating tool during pending sales that would allow you to reduce the price, or otherwise break off the deal entirely. Many real estate deals gone bad could have been saved with a proper appraisal.
Bottom Line
Real estate investing gone bad can be a huge detriment to any investor’s career. But by using this guide, you’ll know how to avoid a lemon. Finding real estate deals– good ones – depends pretty heavily on using the right tools, and thankfully it’s easier than ever to find them.