Is the property you are considering a risky investment or will it produce a great Return on your investment? It all depends on what’s wrong with the property and what needs to be repaired. Typically, most investment properties will need some painting and repair work on the inside and usually investors are expecting these types of things will need to be done. However, roof and foundation repairs are the most expensive and could mean the difference between a positive ROI or a negative one.
Most investment property is sold “as-is” which is a way for the seller to confuse people into thinking that they won’t make repairs and won’t discount the property more than it already is. That is not necessarily that case. Also, most owners of these properties don’t know the shape their property is in to begin with.
For instance, just recently I inspected a property for some out-of-town investors and the property I inspected had a 7 inch hole in the roof!
The property owner had no idea that was there. Since the hole was above the kitchen, the water coming into the house was behind the wall and above the kitchen cabinets. The water damage was not visible on the inside (unless you know what to look for), and since the renters were on the messy side (that’s putting it mildly), water stains and other stains were indistinguishable from each other. That 7 inch hole may be responsible for other things that will need to be repaired.
That’s why it’s critical to have a inspection that reviews all these critical components, because the more informed you are about your potential investment, the better your chances for a profitable outcome.
What do investment inspections cover?
Some home inspectors offer a special type of inspection just for investors. I do, it’s called (wait for it) an Investor Inspection, which includes all the major components like:
- Roof
- Attic
- Electrical
- Plumbing
- HVAC (heating and cooling)
- Foundation
It’s a stripped down version of a Full Home Inspection, and gives a general idea of what the “bones” of the house is like. However, it’s not nearly as complete as a full inspection.
Common Red Flags you should watch out for…
Structural
Structural problems can lead to costly repairs down the road and can be the most expensive in terms of repairing it right. The grading around the outside is usually the main culprit with foundation issues, however gutters and downspouts are also big contributors.
Cracks that run vertically are not as big an issue as cracks that run horizontally. Vertical cracks are usually the result of the foundation being pulled at either end, usually from the soil drying out. That’s why it’s recommended to “water” you foundation in very dry summer months. Horizontal cracks are usually caused by water sitting next to the foundation, and through the freeze/thaw process, puts pressure on the outside of the wall.
Termite and water damage to supporting beams and sills can lead to uneven floors, out of plum door frames, and other such issues. If these things aren’t repaired, it could be a problem when you go to resell the property later.
Roofing and Siding
A roof is 10% the cost of the house, but 90% of the liability. A roof that leaks, or gutters and downspouts that don’t move water away from the structure, will do the most damage to the house than any other source. Gaps or damage in the siding can lead to interior water leaks resulting in wood rot, and potentially mold.
An inspection of the roof, from the roofs surface, is the best way to spot these issues and deal with them accordingly. Replacing an entire roof is expensive, but if it just has some exposed areas in a few locations, it could be a relatively minor expense.
Electrical
Let’s start by saying that the homes wiring only has to meet the code that was in force at the time of construction. However, if changes are made to the homes wiring, then it has to meet current codes. So, for instance, I inspected a house not long ago where the outside utility line coming into the house was not 10 feet above a deck. Since this is a safety issue, it has to be dealt with, which means that it all has to be brought up to today’s code standards (from the point of entry, electrical mast and panel).
Also, never assume that someone has repaired or wired things into the panel correctly. I see all the time where breakers are double-tapped (meaning there are two wires inserted into one lug) or tapped main lugs, which is a big no-no.
These types of things are fire hazards and should be corrected immediately. Electrical risks are common in older properties and addressing them will reduce the biggest risk to the property, which is fire. Never underestimate someone’s ability to wire something improperly. I see it all the time.
HVAC (Heating and AC)
The average life span of a furnace and air conditioner is around 15 to 20 years, depending on how it’s been serviced throughout it’s life span. If it’s older and in need of repair, you could be faced with a large expense up front. Additionally, the furnace manufacture date is usually coded into the serial number, and many times I find that the unit is much older than what was stated in the sellers disclosure.
There are also some tell-tale signs that an aging furnace is in need of repair or replacement. Discolored flames, noises, and gas leaks are just some of the issues I see on a daily basis. Also, the inspection report can alert you that the furnace is a bigger problem than the sellers are making it out to be.
Not all repairs need immediate attention.
The inspection report should list every defect, in detail, but not all of these issues need to be repaired right away. Sometimes they can be put off after a renter is in and your recouping some of your initial investment. Cosmetic items, like mismatched interior paint or some missing kitchen tiles, do not necessarily need to be addressed right away. Of course, it will make the property more inviting to higher-end renters, which may be key if you are purchasing in a competitive rental market. Keep in mind that some improvements or cosmetic repairs will not impact your liability for tenant injuries or damages, which is typically your main concern.
Read the entire Inspection Report.
Once you have the inspection report, read the entire thing, and call the contractors suggested to get estimates on what it would cost to repair the main issues noted.
I personally work with a company that produces a report (from my inspection report) with what each individual item will cost to repair. It’s a great time saver as opposed to having a bid from various contractors. It’s not perfect, but it will give you a good idea of what you can expect.
After you have a comprehensive list of what needs to be repaired, and the prices of each, then you’re in good shape to figure a return on your investment. Also, a good real estate agent or broker might be able to negotiate a reduction in price to compensate you for the repair costs.
I hope this helps in clearing up whether you should get an inspection for your investment properties. In my opinion, it’s just smart business.
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