The Veto List - Warning Signs and Things to Look for Before You Buy an Investment Property
Renters Warehouse Blog
The Veto List - Warning Signs and Things to Look for Before You Buy an Investment Property
Ever seen the 1986 movie, “The Money Pit?” If not, then you’ll want to.
In the movie, a young Tom Hanks and Shelly Long discover the perils that can come when rushing into a fixer-upper unprepared. After purchasing a grand house in the city, they discover they’ve ended up with a money pit, a property that might look great on the outside, but that conceals a number of costly problems. Electrical wires catching fire, exploding ovens, and bathtubs collapsing through the floor soon become a clear indication that they may have made a bad decision.
Exploding ovens aside, finding a fixer-upper can work out to be a great investment in some cases. A rundown property often goes for much less than its market value, meaning you can secure a property in a good area, for much less than it’s worth. But of course, this depends on the final after repair value (ARV) of the property, and whether you’re aware of everything that will need to be done on the property as well. Spoiler alert: Tom Hanks was not!
If you’re interested in buying a rental property and wondering whether a fixer-upper is a good choice for you, let’s take a look at some things that you’ll want to look out for before you dive in.
What to Look for in an Investment Property
Finding an investment property is an exciting time. But landing on an excellent property, one that checks all of the boxes and constitutes a good return on your investment can be a challenge!
While there are plenty of good fix-and-flip houses out there that make sense for certain investors, there are also a lot that could be deal-breakers as well. It all depends on your margins and your projected ARV after the repairs are factored in.
With this in mind, let’s take a look at some renovations that can end up being especially costly. Things that you may not want to touch unless you are able to secure a very good deal on a property, and can guarantee that the after repairs value will be high enough to warrant doing these repairs. There are things that an inspector will scatch for you, but there are a number of red flags that you can look out for yourself that could alert you that a property isn’t worth considering further.
Before you get started, consider reading Things Every New Investor Should Do Before Buying a Property to get some inside information about investing.
Cracks in the Foundation
Cracks in the foundation can be indicative of foundational problems, which can be extremely costly. You don’t often have a lot of time to wait to perform these repairs and the longer you wait, the worse it becomes. Unless you are sure that the deal you are getting on the house will allow you to invest money into foundational repairs, then a house with foundation issues can be a devastating investment that you will want to avoid.
While some smaller cracks can be inductive of normal house-shifting, large and noticeable cracks in the foundation are often a tell-tale sign that there are more severe issues going on. Older properties that are in areas that are prone to especially cold winters often experience this, so be on the lookout if you’re thinking of investing in something like this. There are also other factors that can help to alert you to potential foundational or structural issues as well. Things such as uneven or bouncy floors or external paving that slopes towards the home should be a red flag.
An easy way to check for slanting or sloping rooms in a home - apart from the general discomfort felt when walking - is to lay something round on a countertop; does it hold still or slide off the edge? A little bit of movement is no concern, but anything more should be a warning sign.
Mold or Mildew Problems
Mold or mildew problems are something else you will want to avoid. While there most likely won’t be signs posted saying “mold found here,” there are some things you can look for to help determine if it is an issue.
First of all, rely on your sense of smell. A musty smell can often be an indicator that there’s damp but you should also consider smells that are there to cover up the smell of mold or mildew. If the house has been covered with fragrance or mothballs, for instance, perhaps they are hiding something. Or if there are only patches of fresh paint as opposed to an entire room being freshened up, you might ask what is being hidden. If the lower parts of drywall are missing you can almost guarantee that there has been some battle with mildew or mold in the past.
Even if you don’t see or smell mildew, you can often anticipate where it will be a problem. If a bathroom doesn’t have a window or a proper ventilation system installed, you can guarantee mildew or mold has been an issue there before and will be an issue for you, as a landlord. In addition, if the home has a very humid basement with small windows that are not likely to be opened for ventilation, you can be sure that mildew will be a problem in the future.
Spraying to protect a home or basement foundation from mold and mildew isn’t very expensive, but you’ll want to consider what’s causing the issue in the first place. Bigger issues, like mold on the ceiling, for instance, could indicate a more serious problem, such as a leaking roof which may need to be replaced.
Signs of Leaks
This brings us to our next point. Leaky roofs are another item on the veto list. This is not only because of the cost of a new roof but also because a roof that has been leaking for any length of time and has gone unfixed can cause additional structural problems as well, such as rot and mold. If left for too long, you may need to replace the support beams underneath the roofing, as well as the ceiling and drywall, as well as insulation. You should also look for signs of leaking plumbing which can be costly to fix.
Like we touched on above, keep your eyes open for brown spots or freshly painted ceilings as many buyers will add a quick coat of paint to cover up water stains or damage. While the damage from leaks can be dealt with, it is important to know what you are getting into first.
Even if there are no telltale signs available to you, walking through the basement and touching accessible pipes may help you determine if there are plumbing concerns. They will often feel wet or humid to the touch if there is a potential leak issue. Likewise, check beneath the cupboards and note whether the plumbing has been updated recently. If you see aging pipes, this could be an indicator that the rest of the plumbing in the house will need to be upgraded soon as well.
Most roofs will last between 15 and 25 years, depending on materials and location. A property that’s near deciduous trees, for instance, may age faster as leaves will help to accelerate rot. If the house you are considering was built in that timeframe or before, you might consider the condition of the roof to ensure that it won’t be needing to be replaced right away or that there isn’t already an issue.
Look for loose or missing pieces of roofing or patch jobs that could indicate some issues in the near future. Knowing the condition of the roof will help you determine if you need to budget repair or replacement or if you have some time before it will need to be replaced.
Ask sellers when they last did their roof, which company managed the repairs, and how long it’s guaranteed for. You should also make sure that gutters are connected and don’t leak at the roofline as this can cause water damage in the house or icicle build-up. If you happen to visit the house on a rainy day, this will be easier to spot.
Outdated HVAC or Water Heating System
The HVAC system should also be checked as you do your rounds around a potential investment property. In addition, water heating tanks and systems need to also be in perfect working order for future renters.
If everything seems to be in working order you should consider how old it is and how much maintenance has been done to it and then calculate the cost of repairs or even replacement when it comes time to run the numbers. Doing so will help you avoid any surprises in the near future, as these can be expensive to replace.
Wondering what other things you should consider before investing in a rental property? Read: Questions You Should Ask Before Investing in a Rental Property.
While there is a lot that can be changed about a house on the inside and out, one thing you cannot change is the neighborhood. If a property looks too good to be true and everything inside checks out, be sure to check out the local area.
Research the other rental units in the area and if possible, see what the asking rent is like, and determine how long their vacancies have lasted. Ask the neighbors for an inside scoop on the area, doing as much as you can to determine if the neighborhood is as good as it looks or if it is an area you should be paying closer attention to. Investigate crime rates in the area, keep an eye out for extensive graffiti, and trust your instinct when it comes to how safe you feel being there. You can’t relocate your investment property, so be sure the location you pick is ideal for your renters.
Unavailable for Inspection
Finally, one final - and crucial - red flag you should consider as a warning sign is if the sellers refuse an inspection or if they don’t allow you inside to do a walkthrough. While there are certain cases where this may happen, such as online auctions, for the most part, if a seller won’t allow you inside to inspect, you can almost guarantee they are hiding something. Is this a gamble you are willing to take?
When it comes to buying an investment property, make sure you do your research first. This can save you from a great deal of hassle and will help you to ensure that you’re getting a rental that will be profitable: and not a money pit. And if you are looking for a fixer-upper, make sure you’re well-informed as to how much work you will be doing so you can accurately estimate how much money you will be spending and ensure that you’ll be turning a profit.
Learn more about calculating the after repair value of a property and see what EVERY new investor should do first, before buying a property.
Looking to invest? Renters Warehouse, we offer tools that you need to make informed decisions. Take a look at our available inventory of investment properties that are ready to go, or head over to our Research Center to learn about the market that you’re planning to invest in.
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