Warning signs: What to look out for when buying an investment property

It doesn’t matter if you’re just starting or a system veteran; buying investment property carries the same rules.

As you may have already gathered, today’s article will cover warning signs to look out for when buying an investment property. In truth, many of these apply if you’re buying a domestic property to live in or one to rent out. Of course, the financial repercussions can be much more complicated in terms of the latter.

Let’s now jump into some of these signs…

It’s in the middle of umpteen new developments

Of course, there’s nothing wrong with a bit of competition. But, if an area is awash with new developments, it might indicate that the market is about to become saturated. This could lead to a decrease in rental prices and, as a result, a reduction in your return on investment.

There are also potential long-term repercussions. After all, if countless other properties now surround you, there’s every chance that supply outweighs demand. The result? You may fall into the dreaded trap of negative equity if you purchased with a mortgage – and that’s a route you certainly don’t want to go down.

The dreaded ground rent and service charges

You’ll almost certainly be liable for ground rent and service charges if you’re buying a leasehold property. These can quickly add up, and there’s no guarantee that they won’t go up in the future.

Before you sign on the dotted line, be sure to check how much you’ll be expected to pay and, perhaps more importantly, how these figures will change in the future. Also, check the lease terms to see if there are any restrictions or if you need permission to make any changes (e.g. redecorating).

There’s been a lot of controversy about these charges, with many landlords paying thousands per year for the privilege. They can have hugely damaging effects on your final yield (which is already lower than the real estate brochures may have suggested, thanks to landlord insurance fees, legal certificates and even local authority costs in some areas)

Rents have stagnated over recent years

Of course, there are peaks and troughs in any market. But, if rents have stagnated or decreased in an area over a prolonged period, it’s a cause for concern.

It could indicate that the local economy is struggling or that there are simply too many properties on the market. In either case, it’s worth doing your research before you commit to anything.

The property needs major repairs

A property in need of significant repairs can be a red flag. It will cost you a fortune to put right, and it could also mean that you cannot rent it out until the work is completed.

What’s more, if the repairs are structural, there’s a chance that you won’t be able to get a mortgage to fund the work. So, not only will you have to find the money upfront, but you could also be left with a property that’s difficult to sell.

Now, there is a caveat to the above. After all, some landlords thrive on these fixer-uppers and are keen to get these unkept properties at knockdown prices to capitalise. Such an approach is admirable and can work wonders but is perhaps only advisable for experienced investors who know how the system works.