It can be very intimidating when buying your first house, whether it is your personal residence or an investment property. One mistake investors make is they underestimate the repairs and maintenance that will be needed on a property. If you do your homework and buy right, you can make a lot of money on rental properties. You can also get burned if you buy the wrong house that may look like a great deal but constantly needs work. There are many things you can do before you buy a home to determine if the maintenance and repairs will eat into all your cash flow or whether they will be manageable.
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I am making at least 20 percent cash on cash return on my rental properties. Here is a guide detailing my investment strategies, buying tips and detailed figures on my rentals.
Do not underestimate the repairs needed on rental properties
The most common mistake I see when people buy investment properties is they buy a house in really bad shape with major problems and underestimate the repairs needed. If you are buying a home and you have the option, always get an inspection done by an inspector or a contractor you trust. Even professionals like myself can miss major issues that an inspector will find.
Some issues that I stay away from are foundation issues, structural problems, major mold issues and meth houses. Not only are these repairs extremely expensive, it can be very hard to estimate how much the total cost may be, as many times the full extent of the problem is not known until the repair is started. These types of repairs also take a long time to fix, meaning you are spending more money on mortgage payments without any rent coming in. If possible, get bids from contractors for major repairs before you buy a property. Here is a great article on how to repair investment property once you buy it.
Some repairs sound worse than they really are on rental properties
Some repairs sound nasty and expensive, but can actually be cheap to fix if you do your research before buying the home. Frozen pipes are common in a foreclosure, and can be a $200 fix or a $10,000 fix depending on the severity. Make sure you have a plumber check out the plumbing if you suspect there is an issue and get an estimate. Plumbing can scare away many buyers, but if it is a cheap fix it can create opportunity for the savvy buyer.
Mold is an extremely scary work in today’s real estate market, but it is not always a major issue. Minor mold issues can usually be remediated fairly inexpensively, but get an estimate from an environmental specialist to make sure. You also need to find the cause of the mold before you buy, it could be a minor leak that was fixed or a major foundation issue where water is seeping through the walls. It doesn’t do any good to fix the mold if you don’t fix the cause and it comes back.
Many homes have old electrical which can be very expensive to replace, but some homes have newer electrical with minor problems. Most electrical issues can be repaired easily by an electrician, but watch out for aluminum wires, old wiring or homeowner jobs that are not up to code. Not only can these be very expensive to fix, but they can cause a fire. The first priority in renting out property is making sure the home is safe for the renters.
The older a home is, the more you will spend on repairs
I try to avoid buying homes built prior to 1960. There are a lot of great older homes, but there is also a much better chance of older homes needing major repairs and eating away all your cash. You also have to worry about lead based paint on any house built prior to 1978. Any contractor disturbing lead based paint must be certified to perform the work, so be careful who is making repairs on your older homes. The government can fine your contractor 10’s of thousands of dollars if lead based paint is disturbed and not removed properly. In many areas it is very difficult to find a good deal on newer homes. If you must buy an older home, make sure it is checked out thoroughly and you are prepared to spend more on maintenance! Check out my cash flow calculator, which includes a maintenance estimating tool.
The more repairs needed, the longer it will take to rent a home
Not only can repairs themselves be very costly, but each day you are making repairs you are losing money. If a home is being repaired, it is not being rented, but you are still paying carrying costs. Carrying costs include interest on a loan, utilities, insurance, HOA dues and more. If you are going to buy a home that needs a lot of repairs, make sure you figure these extra carrying costs into your total cost estimates.
Always overestimate the cost of repairs on rental property
No matter how many properties I repair, the cost is always more than I think it will be. Either the contractors raise their prices, the contractors find more repairs than I planned for or it takes longer to make repairs. It is always best to overestimate the cost of repairs when deciding if you should buy a rental property.
The best way to start buying rental properties is to buy a home that needs minimal cosmetic repairs that you can fix up easily and quickly. Always get estimates on repairs before you buy the home, and add a few thousand dollars to your estimates for unexpected repairs. If your only option is to buy an older home that needs a lot of work, make sure you get as many estimates as possible, and account for the extra time the repairs will take. Following these tips will help you make a good rental property investment.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.