|
Getting your Trinity Audio player ready...
|
Thinking about buying a fixer-upper to add to your rental portfolio? It’s not always a piece of cake.
First things first, do you have a contractor you know and trust? Are they licensed and insured? Get a few quotes before submitting an offer on the property, to get an accurate sense of the renovation costs. (See our article on how to screen contractors for more information.)
When you do submit an offer, be sure to include an inspection clause in the contract, allowing you to withdraw the offer with no penalty if the home inspection reveals more issues than you want to tackle. Sure, home inspections cost a few hundred dollars, but it can save you tens of thousands of dollars later, and the education you’ll gain by walking through the property with the home inspector is worth the cost alone.
The home inspector will help you discover what kind of shape the mechanicals and structure of the house are in, and will reveal potentially nasty surprises. This writer once bought a house that needed all new framing – a fact that came to light only after the property was purchased, and the contractor pulled the plaster away to reveal rotten framing. It was a bad day.
Mechanical and structural problems are particularly dangerous territory to get into, for several reasons. In many municipalities, landlords must obtain permits to do any structural work on a property, or to update mechanicals such as HVAC systems, electrical wiring or plumbing. Aside from the additional expense of the permits, scheduling inspections can delay the project, and inspectors sometimes fail properties simply to show their supervisors that they are doing their jobs. In larger jurisdictions, it is often a different inspector that comes to the property each time, and will often each find different reasons to fail the property. Further, when permits are filed, the contractor listed on the permit must be licensed; often with lower-end properties, real estate investors use unlicensed handymen for the repairs, to keep the project profitable.
Beyond the multiple hazards posed by filing for permits, another set of problems comes into play when mechanical updates and structural repairs are needed: return on investment. If the pipes are out of date in a property, it is often not calculated into the price, as sellers will not want to emphasize these oft-invisible problems, and many buyers will not notice without a home inspection. It may be six months later, when the pipes fail, that it becomes clear that $12,000 worth of new plumbing is needed.
Unlike cosmetic repairs or updates to kitchens and bathrooms, which are visibly obvious and will affect the rent and resale price, structural and mechanical repairs often have little to no impact on value. Real estate investors are wise to account for any needed repairs before buying, and negotiate for a lower acquisition price accordingly.
Even homes with attractive finishes can often be improved for higher rents, by adding high-tech gadgets, novelties or luxuries. Sometimes these improvements offer a strong return on investment; check out this review of five smart-home updates, and this consideration of higher-end rental amenities.
Establish a strong working relationship with a home inspector, and multiple strong relationships with contractors of various price points. You need a cheap handyman for basic repairs, and more expensive specialists for items like HVAC and roof repairs. These relationships should all be established on smaller jobs first, ideally on homes you already own, or on smaller new purchases. Your real estate agent should also act as a second set of eyes when you initially walk through the property, with a keen eye for water damage, pipe leaks, basement leaks, age of the furnace and hot water heater, etc.
There are few real estate investing strategies that are as fundamentally sound as buying homes in need of basic repairs, to create equity quickly, but it is also easy to slip into deep water with unpredicted repair costs. If you do elect this strategy, use an experienced home inspector, have several contractors at the ready, and always budget 15% more for repairs than you think the job will cost.
And always, always beware of structural or mechanical problems in a house, and aggressively negotiate the buying price down if these issues are present.
(Read here for further tips about renovation investing as a real estate investing strategy.)
