Nobody wants to be described as “easy prey,” but too many new real estate investors are, says investor Justin Pierce in The Washington Post. Unfortunately, he’s right: bad deals and advice abound, carefully calculated to part novices and veterans from their money.
Investors of all stripes must be alert to red flags on each and every investment opportunity. It’s all too easy to be snared by opaque metrics, shady dealings and not-as-advertised properties. Look for these four red flags on your next deal.
1. Real Estate Investment Metrics That Don’t Add Up
When the numbers don’t add up, it’s usually not because of bad math. It’s because one or more parties are hiding or misrepresenting data.
Make judgments based on numbers from actual documents like tax returns and owner records, rather than estimates or projections. Tangible metrics, which include net income, cash flow, cash-on-cash returns and ROI, should make sense. If they don’t, and parties to the real estate investment can’t explain why they don’t, move on to a more transparent deal.
2. Credibility Warning Signs
Trust is the cornerstone of any real estate deal. And it’s a significant factor no matter where your deal takes place, even if that location is a crowdfunding platform online.
As real estate crowdfunding grows in popularity, investors should look for the same red flags they would in traditional investments, namely fraud, relaxed credit standards and lack of investor protection. If a crowdfunding platform doesn’t show you how it protects investors or isn’t well-capitalized, pass it up the same as you would any untrustworthy deal on paper.
3. Poorly Located Property
Real estate’s all about location, but too many investors forget that a great property in a poor location could be a red flag rather than an investment opportunity. Optimistic upside projections are based on one big “if”: if anybody actually wants to live or work in a given area.
That “if” is based on dozens of factors, from crime levels and prevalence of vandalism to school quality and local economy health. If a location isn’t somewhere you’d live or work yourself, proceed with caution—no matter how the numbers look on paper.
4. Short, High-Level Investment Memos
It’s easy to think an investment’s cost is the amount of money you put into the pot. But what about all the hidden costs, like local demand for specific types of properties, the experience of the investment party or the actual (versus the projected) costs of renovation?
These hidden costs of ownership really shouldn’t be hidden. They should be detailed in a thorough investment memo. Unfortunately, these costs are often obscured by fanciful, high-level memos that fail to list out market overviews, downside scenarios and other important investment details.