Friday, July 8, 2011

Rental Properties - Avoid Certain Repairs

You're scouting the area and you've found a property that you want to buy to rent out!  Exciting!  Hold on.......Remember depending on the area you are looking at, you need to understand the "comps" if your rental property is a single family home or has just a few units up to approximately a 5-plex.  In other words, comparable property sales in the general area of where you are intending to buy.  Once you get this information online, or your real estate agent, you then need to determine what if any repairs you are going to have to do on the property to get it up to the standards necessary for rentals in the area.  For larger multi-plexes, other factors come into consideration when determining whether you are getting a good deal or not.  Get estimates on what those repairs are going to cost and then determine whether you are going to consider asking for a "repair allowance" as a result of those.  You are not going to ask for a reduction in price, but you are asking for a repair allowance.  More on that later....  Remember that necessary repairs and "I want to do just because" repairs are not the same thing.

You are not moving into the property, so don't use "your standards" to determine what needs to be done.  You want to make it comfortable, clean and competitive with your competition.  Just because you want Moen taps and Kohler toilets in your house, doesn't mean you need to do that in your rental.  I think you know what I mean.

Almost all cosmetic repairs increase the value of one's property, however there are many structural and environmental repairs that add zero value, yet are very expensive.  These are to avoid....Check the area that your potential home is in and ask if there are any concerns about the property, such as a gas station or factory that is nearby or used to be in the area.  Ask your agent, and speak with the neighbors nearby.  Ask questions about the neighborhood, potential crime, and any other questions that may come up about the property.  Now is the time to get those questions answered, before you put an offer on it.  It costs nothing to ask questions and all you have to do is be friendly and ask away.  In the long run, you can save yourself thousands of dollars and many hours of work just by being inquisitive.

If everything works out well and you are satisfied with your property inspection (I recommend using either a qualified building inspector or engineering company to perform the inspection), then submit the offer  Note that engineering inspection companies carry liability insurance so if they miss something major, you most likely will be covered (check their policies and terms and conditions). A building inspector will typically have a multitude of waivers to prevent you from going after them in court if something arises after their inspection.  They are trying and usually do a pretty good job, but there are no guarantees and once you see the legal document you are asked to sign when you contract a building inspector, you'll understand that any problems that happen after the fact are going to be yours and yours only, so be careful on who you hire to inspect your home.  

You should not make the mistake of just reducing the offer price by the amount of your repair costs because you will still need to come up with that money after closing to do the repairs.  You should ask for a repair allowance for this amount on closing, so your financing will effectively fund the repairs.  Certain banks have limits on how much repairs allowance they will allow but you should be able to figure all of this out prior to submitting the offer.  The seller may agree or they may tell you where to go.  If it's the latter, then simply walk away.  There are plenty of opportunities out there and if you walk away, the seller just may want you back.  If not, don't sweat it, and move onto the next opportunity.

Hope this offers some guidelines that will help you.

Until next time, be well!

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