Sunday, October 15, 2017

How I Approach Inspections for my new Rentals

I am in the process of acquiring three new rental properties: a two bedroom single home and two duplexes. Inspections took place yesterday and I'd like to summarize my approach and some of my key take-aways.

Knowledgeable Home Inspector

It's important to get an inspector who knows his trade very well and has lots of experience. Usually, your real estate agent can recommend a good inspector to you in the area.  Make sure that both your real estate agent and the inspector specialize in investment properties of the type you are interested in. 

In my case, I am after older singles, duplexes, and triplexes that need some clean up / modernization and catch up on maintenance but have good bones and structure. The inspector who went through the houses with me yesterday was recommended to me by my real estate agent.  He is a retired construction company owner and has built over 30 houses start to finish in the town where I am buying. In addition, he has framed and re-framed over 130 houses; and has worked in a leading hydro company for many years. 

Don't be afraid to tag along with your inspector and ask questions. It's your opportunity to learn about your property and plan out how to address key issues.

Goals for the Inspection


For every small property before I make an offer, I automatically add a budget for repairs and maintenance that I expect to spend within the first 1-2 years of ownership. During inspection, I assess if the budget I have in mind will be sufficient or needs to be adjusted. I look at the worst case projections after the inspection and figure out if the investment still makes sense.

During inspection, I follow the inspector, ask him (I haven't run into a lady inspector yet!) to tell me about key priority items and repeat back my understanding to him. My goal is to walk away with three things:

1) Any small but high priority items that must be fixed ASAP 
2) Major (most costly) items that must be fixed as soon as possible and their approximate cost
3) Answers to the questions for my insurance agent, so I can get a quote on insurance

Typical Small High Priority Items


Water Related 


Anything water related can cause a major issue if you don't address the root of the problem promptly. For example, once a tenant told my husband that she thought she heard an annoying drop behind her shower wall. My husband came by and didn't hear anything major, so we decided to wait and see how it goes. Several days later, the tenant called us at 10 PM and said that water was rapidly flooding into her bedroom from under the floor... It turned out the annoying drop was coming out of  a rotted pipe that was about to burst. In my experience, water situations end up really costly and in many cases are preventable, so at inspection I keep track of things like:
  • Caulking in the bathrooms and kitchens
  • Missing water stoppers and shower curtains without magnets
  • Leaking toilets or faucets
  • Clogged toilets 
  • Clogged or slowly draining sinks
  • Eaves plugged with leaves or dirt
  • Missing down spouts or parts of them

Keep Good Tenants Happy


Tenant turn over is costly. If I run into a good tenant (i.e. unit looks clean and taken care of!), I always ask them if there are any items they'd like to get addressed. For example, a tenant that I saw yesterday shared with me that he loves the place and the only thing that would really help him is having a washer / dryer at the house. I will definitely add a coin laundry as soon as possible. This will help me keep the tenant happy and get some additional cash flow as well. Missing mosquito nets on windows is another frequent complaint that can be easily resolved.


Safety Concerns


Health and safety related items should always be first to be addressed. I believe in being safe rather than sorry. Here are some items you can take note of during inspection:

  • Sufficient number of functional fire alarms
  • Railing on all stairs
  • All outlets must have covers
  • Lose or missing posts in a balcony railing
  • Mold in the bathroom or on window seals
  • Wires touching steel pipes in an unfinished basement
  • Missing brackets that hold hydro cables on the side of your house.

Other Things Per Inspector 



Make an effort to address as many items as possible of the ones that your Inspector points out to you as important (no matter how small they are). Here are some examples of what I have on my list now based on the inspection yesterday:
  • 2 feet of galvanized pipe to be replaced with copper
  • Furnace needs serious cleaning
  • Get electrician to replace some knob-and-tube (to be honest, I wrote down what inspector told me but had to google this term he-he)
  • Lock up unsafe garage and don't let tenants use it 


Tally Up Bigger Items


Here is what usually goes onto my bigger items list. I typically get houses with existing tenants. However, my list includes all updates that I'd have to do to make a unit look fresh and relatively modern as soon as one of existing tenants moves out. The benefit is that you can get a great new tenant and increase the rent to market. Also, it is crucial to make sure deferred maintenance doesn't build up.

Note: only keep track of what is applicable in your situation. You don't have to worry about all of the below! But you'll likely have 2-3 major items if you are buying an older property.

External:


  • Roof: 3-5K (Flat roofs are more expensive)
  • Garage door: 1.5K
  • Eaves & Siding fixes: 1 - 2 K get a quote from your roofer
  • Trim a gigantic tree: 1.5K

Internal:


  • Replace / remove old carpets or other flooring: 5K
  • Bathroom renovation: 5K
  • Add fan to a bathroom and paint/clean: 1.5K
  • Kitchen renovation: 5K
  • Paining & wall patching: Size of house times 2.5
  • New LED light fixtures all across: # lights times $40
  • New furnace / water tanks: Get rental and add to monthly expenses
  • New toilet: $250 times number of old toilets
  • Dispose of a ton of garbage: $500 
  • Cockroaches: $500
  • Bed bugs: 1.5K plus a big head ache
  • Freshen up a small and relatively tidy unit: 5K
    • New outlets, switches, and covers all across
    • New white blinds on all windows
    • New thermostats
    • New door knobs and locks
    • A fresh coat of paint
I typically notice that a relatively clean and small unit takes 3-5K. A townhouse with several bigger items takes 10-15K. Sometimes things go wrong all at once and I spend 25K on a house within the first year. 

One of the property managers that I love reading and listening to and have learned a lot from is Nick Sidoti (http://www.drcashflow.net/). Nick says that there is no deferred maintenance, but there are owners who don't take care of their properties.


Mistakes Avoided and Made


I had once walked away from a property with foundation and structural issues. The house was a century house with wooden foundation. Inspector pointed out to me that almost all of the structural elements seem to have been moist over a long period of time (years) and water caused so much damage that I would have to address this ASAP.  My gut feeling told me that it would be a few additional thousands on top of my typical "internal/external" wear and tear items described above and I decided that I'm not yet prepared to take on such a major project. 

Besides house inspection, I always revisit market research, re-evaluate cash flow potential from the property I am purchasing and assess all key day-to-day expenses (taxes, utilities, insurance, mortgage) at the time of inspection. In one of the deals, I noticed as part of my checking that MPAC assessment value was more than twice lower compared to the purchase price and that taxes on a property decreased by 2 times in the last four years. This was unusual for me, so I started looking further and discovered that I was about to pay twice the current market price. I was happy I re-checked and didn't get myself into trouble.

Once, I purchased a property for a lot higher price than I should have. This was because I underestimated the cost of electricity. In a 6-unit building, the seller only had 2 units in use, but made it seem as if 4 were occupied. Timing coincided with a spike of hydro costs in Ontario. Unfortunately, this was one of my early purchases and I didn't know how to estimate utilities properly. Cash flow was negative. Tenant issues added to the trouble. After holding the property for two years, I successfully sold it and broke even thanks to hand-holding from one of my real estate coaches Don at Dave Lindahl's group (https://rementor.com/). This was a great learning experience.



Info I Provide To My Insurance Agent


During inspection, I always confirm all the info I have to send to my insurance agent, so she can help me with an insurance quote. Here is the list of insurance questions and #10 is what you should get during the inspection:
  1. Who will be the registered owner of the property? 
  2. Are all the units occupied? 
  3. Are any of the units rented to students? 
  4. Are there annual leases with all tenants? 
  5. Do you require that all tenants carry insurance? 
  6. What is the annual rental income for all units? 
  7. Who is responsible for the maintenance of the property including snow removal? 
  8. What building limit do you require? 
  9. What limit of coverage to you require for the appliances (laundry, fridges & stoves)? 
  10. Please provide information regarding the updates:
a)      Roof – type of roof, when updated? 
b)      Heating – type of heating, when updated?
c)       Electrical – type of electrical, fuses or breakers, what ampage, when updated? 
d)      Plumbing – type of plumbing and when updated?


I hope this article is helpful! Ping me if you come across it in the WWW and would like to bounce off ideas. Also, please ping me if you'd like to add or adjust any of my findings based on your experiences, so we can keep growing this cash flow knowledge base and help out others who'd like to learn.















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