Owning rental properties is one way to generate a stream of passive income. However, not all properties are good investments. Investors need to be aware of potential red flags that could indicate problems. Here are five things to watch out for when investing in rental properties.
Poor location and neighbourhood conditions
The location of a rental property is one of the most important factors determining its long-term value and rental income potential. A property in a declining neighbourhood with high crime rates, undesirable schools or a lack of amenities can struggle to attract reliable tenants.
Before investing, research the area thoroughly by looking at crime statistics, school ratings, employment opportunities and future development plans. A good location should have steady population growth, increasing property values and access to essential services.
High vacancy rates in the area
A high vacancy rate in the part of the city you’re considering can be a sign of weak rental demand, which may lead to extended periods without tenants and a loss of rental income. Look at rental market trends to determine if properties in the area are consistently occupied or if landlords seem to struggle to find tenants.
If vacancy rates are high, investigate why. For instance, it could be due to economic downturns, oversupply of rental units or undesirable neighbourhood conditions. Conversely, a high demand for rentals in the area increases the likelihood of securing reliable tenants and maintaining consistent cash flow.
Structural or maintenance issues
When evaluating a rental property, always conduct a thorough inspection to check for structural or maintenance issues. Problems such as foundation cracks, roof damage, outdated electrical systems, plumbing problems or pest infestations can lead to expensive repairs.
Even if the property is listed at a low price, the cost of renovations and ongoing maintenance can quickly add up and eat into your profits. Hiring a professional inspector to assess the property before purchasing can help identify potential red flags that may not be immediately visible.
Unrealistic seller promises
If a seller is making promises that sound too good to be true, proceed with caution. Claims of guaranteed high returns, long-term tenants in place or "no maintenance needed" should be verified with proper documentation.
Review rental income records, lease agreements and maintenance history to ensure the seller’s claims are accurate. Some sellers may also try to hide major issues, so it's essential to conduct independent research and due diligence before making a purchase decision.
Unfavourable rental laws and regulations
Understanding the rental laws and regulations is crucial before investing. These rules are governed by the province. For example, Alberta doesn’t have rent controls that limit how much you can increase rents over time, while some other provinces do.
Being aware of landlord and tenant rights, including eviction procedures is important. Lengthy and costly eviction procedures can make it difficult to remove problematic tenants, affecting your ability to keep up with inflation and property expenses. Before buying a rental property, consult with a real estate attorney to make sure you are fully aware of your legal obligations.
In closing
Investing in rental properties can be highly rewarding, but it requires careful analysis and due diligence. Watching out for these five red flags and taking the time to thoroughly evaluate potential properties will help ensure a successful and profitable real estate investment.
If you’re ready to find the perfect rental property to launch your portfolio, I’m here to help.
