Smart and experienced investors plan carefully. Because they have been doing it for so long, they have a list, possibly only in their heads, of possible issues that can pop up with any property they might be interested in buying. A search of the internet and the numerous books I have on the shelves in my office, comes up with the usual advice about choosing a property. It’s all valid and important. Inspect the property carefully, check the rent rolls, look for hidden problems, and so forth.
The difference between that excellent advice and what I’m going to discuss here is that it all has to do with the property itself. I’m going to deal with the monsters and assorted creepy critters lurking down the block, inside school district offices and at city hall waiting to pounce on the real estate investor.
These are issues that are difficult to predict.
The drug house next door
Smart investors check out the neighborhoods around prospective properties. That, of course, includes neighborhood crime statistics and the ownership of nearby properties. Unfortunately, very few of us have crystal balls that allow us to see where a neighborhood might go in a couple of years. But everything is fine now.
Then an investor sells an apartment building, gets a new manager or simply stops paying attention and, presto!, in moves a drug dealer or two.
A drug house will do a number on a neighborhood. And they can appear even in what seem to be the most stable neighborhoods.
The disappearing school
Many cities have declining public school enrollments, few for the same reasons. Smart investors carefully check out the school districts and the schools around their prospective investments. After all, good schools draw parents who want their children to get a good education. Most likely, that correlates with responsible parents who will likely be better parents than the parents who think of schools as someplace to send their children to get them out of their hair while they sit in the bar, smoke dope, and wait for their welfare checks.
School boards sometimes make strange decisions and close under-enrolled schools combining them with other schools. Closing a school, especially a first-rate one, can also do a number on a neighborhood.
The school morphs into disaster
Principals and teachers transfer, or are transferred, to different schools every year. Sometimes a principal who had created an exceptional school earns her just reward and is transferred to an under-performing school to work her magic there. Often those principals take teachers with them, the best ones. What replaces that principal and those teachers might make that school less than desirable.
How about an entire school district? Take, for example, the Clayton County, Georgia, school district that lost its accreditation in 2008. That had happened only twice before in 40 years. Think what that did to Clayton County rental properties. They regained accreditation in May 2009, but the damage was done.
A bad school, or school district, does a number on the neighborhood.
Local government does government thinking
It might be a huge increase in property taxes for non-owner occupied properties, a sales tax on rents, or some new fee attached to rental properties. No matter which, it affects the ability of a property to turn a profit. Rents can only go up so far because they have to compete with properties just on the other side of the city limits, which aren’t saddled with those extra costs. That means investment real estate owners can’t make as much of a, or any, profit on their rental properties as the rents go up and the vacancy rate follows.
Of course, then, with vacancies increasing and rent amounts dropping, the money the city anticipated receiving not only disappears but the net receipts decrease. There’s no accounting for government thinking.
Who would have even dreamt of such things happening? But there are even more unexpected and unpredictable events, ones I can’t think of now that are so bizarre and rare that they might happen only once or twice in a century.
Can we think of everything? Obviously we can’t. Can we do something about unexpected events? Usually. The most important thing to remember about rental property investing is to pay attention. After all, real estate investing is hands-on if it is to be successful. Paying attention is more than just careful maintenance and rent collection. It is watching those monsters and creepy critters that can negatively affect our investments.
Then we have to do something about it.