NEVER Buy These Types of Houses as Rental Properties

Nope, don’t do it! Never buy these types of houses! These houses will NOT be good rental properties! We run through a quick list of 5 types of properties that won’t work for real estate investors and we know because we’ve worked with real estate investors big and small and underwritten a lot of deals for them (including a whole lot of no’s). Agree or disagree with our list? What did we miss? Let us know…

We may disappoint some investors and even hurt their feelings when we talk about the types of houses you should never buy as rental properties.

As real estate brokers, we've compiled this quick list to help investors, whether they're brand new or own hundreds of doors. We help the investors underwrite deals, and a lot of those are a no-go. Plus, we get tons of calls from our YouTube channel from landlords needing help with their renters.

(To be fair, there might be a price where even these types of houses could work as investment properties, but the key is knowing just how far below market value you need to get it to make a good deal.)

Let me know in the comments below what you think I missed and where you disagree.

1. Attached Condos

First up are attached condos. This might disappoint a lot of first-time investors since condos often have a lower price point, making them an easier entry into the landlord business.

The problem is the HOA dues. These dues will only continue to rise, eating into your profits over time. Any benefits, like covered utility costs, go to the renter, not the landlord, further shrinking your profit margins.

If there's a major repair needed, like a new roof or paint, and the HOA doesn’t have enough reserves, there will be a special assessment—a cash call for all homeowners. This is above and beyond the regular dues. Over time, HOA dues typically increase as maintenance costs rise and buildings age.

Condos, especially stacked ones, also come with noise complaints and issues with neighbors you can't control. Additionally, appreciation in value and rental rates tend to be lower in condos compared to detached condos or single-family homes.

2. Nonconforming Zoning

Be careful with properties where the zoning doesn’t match the current use. A prime example is a duplex on a lot zoned for single-family homes.

There are two types of nonconforming uses: legal and illegal. Legal nonconforming use means the city allows the current use under existing ordinances, like a duplex on single-family zoned land. Illegal nonconforming use means the city doesn’t recognize the property’s use, and I definitely don’t recommend buying one of these.

For example, in Costa Mesa, CA, you’ll find many legal nonconforming duplexes on R1 (single-family) zoned lots. These were built when the zoning was different. Understanding current zoning and legal uses is crucial. Check the number of utility meters—if there’s only one meter for two units, it could indicate a nonconforming and potentially illegal use.

Even with legal nonconforming properties, you need to know the local ordinances. What happens if there’s a fire? Can you rebuild? Can you expand or remodel? Some cities won’t allow these changes even for legal nonconforming uses.

3. Bootleg Units

Avoid buying properties with illegal (bootleg) units, especially if they have tenants. In places like LA, collecting rent on a bootleg unit is illegal, and tenants can sue landlords for all back rent collected, potentially costing hundreds of thousands of dollars.

If you buy a property with a bootleg unit, ensure it’s vacant before closing and work on legalizing the unit or removing it.

4. Rent Control Areas

Avoid buying in areas with rent control. Surprisingly, many landlords don’t realize their property is under rent control until after closing. Rent control can be at the state, county, or city level, and limits how much rent can increase.

Future changes, like California’s potential Justice for Renters Act, could allow local areas to set rental rates even after a tenant moves out. This affects your pro forma and rent increase expectations.

Just cause ordinances are another aspect of rent control, dictating what a landlord can do to remove a tenant for no-fault reasons, like moving family in or doing major repairs. Understand these local rules before buying, as they often get stricter over time.

5. Shoddy Flips and DIY Work

Finally, avoid shoddy flips and DIY work. While some DIYers do great work, it’s unlikely they excel in every aspect like electrical, plumbing, carpentry, and tile work. Always get a thorough inspection.

Flips can be risky because sellers might cut corners to get the property back on the market quickly, focusing on appearance over crucial systems. Fixing these issues with a tenant in place can be costly and inconvenient.

We can’t wait to hear what you think we missed and/or what you disagree with. Don’t forget to reach out before your next real estate acquisition.

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This is not meant to be a solicitation of a property currently under contract. This is not meant to be legal or tax advice, please consult with the appropriate professional. We are licensed to sell real estate in California (if you need help elsewhere, we can help find a good broker, let us know), CalRE # 01804983.

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