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Redfin asked me which red flags I look for before buying an investment property. My answer was short. Be careful with any deal that only works if everything goes perfectly. This post is the longer version, and it applies whether you are buying a rental yourself or reviewing a syndication as a passive investor.
The short answer
A deal is a red flag when its returns depend on best-case assumptions: rents that rise every year, no surprise repairs, and property values that keep climbing. A sound deal produces cash flow on today’s realistic numbers. It should still hold up after you raise insurance, property taxes, maintenance and vacancy.
Three assumptions that hide in the projections
- Rent growth. Be careful with real estate calculator tools that assume rents go up 5% every year. That is too aggressive. Rerun the numbers with flat rents and see what is left.
- Zero unexpected repairs. Something always breaks. A projection with no room for it is a marketing piece.
- Appreciation carrying the return. If the profit only shows up when you sell at a higher price, the deal depends on a market you do not control.
What I stress-test before buying
Before purchasing, I raise the costs that tend to move against owners and see if the deal still pays:
- Insurance premiums
- Property taxes, which can be reassessed after a sale
- Maintenance costs
- Vacancy
- Economic vacancy, meaning people who live there and are not paying
Economic vacancy is the one I see overlooked most. A building can look full on paper while collections fall behind.
Get the free rental analyzer in my free eCourse >> It shows exactly which lines belong on the P&L when you build a pro forma for a rental property.
If you invest passively
The same test works on a sponsor’s underwriting. You do not have to build the model yourself. You do need to know which assumptions carry the return, so ask:
- What annual rent growth is assumed, and for how many years?
- Is the insurance number a real quote or an estimate?
- Are property taxes projected at the new purchase price?
- What vacancy and non-payment rates are in the model?
- Does the property cash flow at today’s rents?
If the answers get vague, that tells you something too. I cover this process in the Syndication Investing guide and the LP Syndication Due-Diligence eCourse. If you want a second set of eyes on a specific deal, see the Deal Review Desk.
The Redfin article also has other investors on inspections, title problems and local rules. It is worth the read.
If you want to run these numbers yourself, start with my free eCourse at thewealthelevator.com/turnkey. You can download the free analyzer there and see every line of the P&L you should fill in before you buy a rental.
Lane Kawaoka, PE, is the founder of The Wealth Elevator. His track record includes $2.1B in past acquisitions, 10,000+ units acquired and 65+ projects.