By Robert L. Cain, Copyright 2021 Cain Publications, Inc.
PROPERTY NEWS SERVICE
Smart and experienced investors plan thoroughly. Because they have been doing it for so long and so successfully, they have a list, possibly just in their heads, of issues that can pop up with any property they might consider 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. They are all valid, excellent, and important factors to consider: Inspect the property carefully, check the rent rolls, look for hidden problems, and so forth. But these experienced investors do even more.
The difference between that advice and what I’m going to discuss here has to do with what surrounds the property. I’m going to deal with the monsters and assorted creepy critters lurking down the block, inside school district offices, and city hall waiting to pounce on and devour real estate investors.
These issues may be difficult to foresee, but are often discoverable with a little research and keeping up with local news.
The drug house next door
Smart investors survey the neighborhoods around prospective properties. That, of course, includes neighborhood crime statistics and the ownership and management of nearby properties. Unfortunately, few of us have crystal balls that allow us to see where a neighborhood might go in a couple of years even though everything is fine now.
Then a nearby investor sells an apartment building, gets a new manager, or simply stops paying attention and, presto! in moves a drug dealer or two along with the druggy tenants eager to live close to their crystal meth supplier.
A drug house can decimate a neighborhood. And they can appear even in what seems to be the most stable of neighborhoods.
The disappearing school
Many cities suffer from declining public school enrollments, often not even for all 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 babysit 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 bizarre decisions and close under-enrolled schools combining them with other schools. Closing a school, especially a first-rate one, can also decimate 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 gets her just reward and earns a transfer 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 the old 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. An entire school district losing accreditation 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 couldn’t be repaired.
A bad school, or school district, does a number on the neighborhood or even an entire county.
Local government engages in government thinking.
It might be a huge increase in property taxes for non-owner occupied properties, a sales tax on rents, rental inspections, or a new fee inflicted upon 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 that aren’t saddled with those extra costs. That means investment real estate owners can’t make as much, or any, profit on their rental properties as the rents increase and the vacancy rate follow.
Of course, then, with vacancies increasing and rent amounts dropping, the money the city anticipated receiving not only disappears but the net receipts decrease. Let the whining begin. But that’s what governments are good at: government thinking. You can’t do just one thing. Every action has consequences, many predictable.
Who would have even dreamt of such things happening? But there may lurk even more unexpected and unpredictable events, ones I can’t think of now 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 strict attention to everything that might affect property values. After all, real estate investing is hands-on if it is to be successful. Paying attention involves more than just scrupulous maintenance and consistent rent collection. It requires watching out for those monsters and creepy critters waiting to negatively affect our investments.