A common concern people have when contemplating buying rental property is the fear of buying a “money pit.” I share this fear and I have evaluated and walked away from more deals than I have closed because of this possibility. Although the fear and concern is real, it can be mitigated by following a few straightforward rules for rental property inspections.
First, you have to be willing to pay for inspections. You have to be willing to part with this money should the inspections show problems. Recently, properties have been selling too quickly, in some situations, to allow time for proper inspections. I have never made an offer on a property without the right to rescind the offer if the inspections showed that more repair was needed than I was willing to spend. I have always avoided the temptation to buy properties sight unseen or without inspections. Sure, I have missed some great deals, but I have also avoided disasters.
Once you have an accepted offer that is contingent upon passing inspections, you have to spend some money. The first inspection comes from a structural engineer. This is where the structure is assessed for foundation and drainage issues. In my area, this inspection is about $500 and I have rescinded offers after only this inspection. A property that requires foundation repair is often not suited as an investment due to the high costs of these repairs. In my home area, foundations frequently require pier work. Simple pier work alone may not necessarily turn a great deal into a bad deal, but you need to know the extent of the needed repairs to successfully do a financial analysis of the deal.
An inspection from a licensed electrician, plumber, and HVAC professional come next on my list. Each of these represents potentially major defects that could kill my ability to make a profit. Even if the property is not too old, issues with these components could cost thousands of dollars to repair. This is an opportunity for an impartial inspector to assess the workmanship of the construction and the quality of any previous repairs.
Finally, I have a roofing contractor assess the roof. Even if the roof is relatively new, I want someone to evaluate the flashings and assess for abnormal wear and hail damage that could end up costing thousands of dollars. Water damage is easy to paint over. You want to assess the attic for areas of leaking that you may not recognize until the first big storm after you have possession.
If an ounce of prevention is worth a pound of cure, you should apply this principal as part of the due diligence processes for a potential rental property. It is inevitable that the inspectors will find deficiencies in the property. Once you have an estimate of what the repair costs will be, you can always adjust your offer accordingly or just walk away. Obviously, the seller has no obligation to pay for your inspection costs or lower the asking price based upon your findings. My thought is that the negotiation process doesn’t really begin until the inspections are completed and repair costs are estimated.
Don’t let the fear of buying the dreaded “money pit” dash you dreams of owning rental properties. Following these principals has helped me avoid disasters and I hope they help you.
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