Last week I talked about how to improve the ROI on an investment property. I provided specific suggestions for Ivan and Irina for the modest detached single family (DSF) property in which Ivan invested. The salient point is this: Show your potential tenant that the property is loved, clean it up if it needs cleaning, including professional carpet cleaning. Paint- dollar for dollar you get a big bang for your buck when you decide to put in fresh paint. Get creative, instead of a total kitchen rehab, paint the cabinets and replace the countertops with solid surface formica- it is inexpensive, holds up well and can improve a dated kitchen. So the question is: Do we stop with the inside cosmetics?
I don’t think so….
Safety and comfort are even more important than the cosmetic fixes I suggested last week. If you are going to invest in residential property it is important you know the basics of construction code. The code requires that GFI or GFCI outlets are installed in every “wet” area. GFI stands for Ground Fault Interrupter and GFCI stands for Ground Fault Circuit Interrupter. This means all the kitchen and bath outlets as well as any other areas where the outlet might get wet, like laundry rooms and wet bars need these outlets. In the event of an electrical surge or wetness getting into the outlet the flow of electricity will be “interrupted.” You will want to get an electrician to change these out and insure that the outlets are safe and working properly. Since you are going to have an electrician at the property evaluate and determine if there is anything else that would benefit from the attention of an electrician. If there are non-working switches or outlets have them checked out at the same time. The code also requires that every stairwell has a handrail.
Handrails are a simple fix…you can buy brackets and railing at any hardware store and install them yourself with a power drill. However, it is important that the bracket be mounted in a stud because the only thing more disastrous than no handrail is one that gives way when your tenant is holding on to it to climb the stairs. As Ivan walks through his property, he should be looking with a critical eye and thinking, “What can I do to improve this home for perspective tenants?”
- If there is a furnace make sure the filter is changed at least 1x per year.
- If there is a boiler be sure that it has been serviced in the last 2 years.
- Check for leaking pipes under the sinks.
- Make sure the hot water tank is functioning.
- If you are in a hot climate or a climate with wide temperature swings, consider installing ceiling fans- preferably reversible. Tenants can use them to help with cooling in the summer and reversing them in the winter will help move the warm air that gathers near the ceiling down to the living spaces, saving energy.
It is very important that the property is protected with smoke and fire detectors as well as carbon monoxide detectors. Do not neglect this as it won’t go well for you in the event of a fire!
So, by now Ivan has had a myocardial infarction and if it doesn’t kill him Irina probably will.
How Could Ivan Have Saved Himself?
If Ivan did his homework from part one of Investing in Real Estate he will have avoided quite a few of these pitfalls. Ivan needed to choose an experienced agent to guide him through the process. When buying investment real estate the buyer has the opportunity to inspect the property. Upon inspection the buyer may do one of three things: waive their rights with regard to this contract contingency (do nothing), terminate the contract based on their rights under this contingency, or request that the seller either make repairs or concede money under the inspection contingency.
If the inspection reveals material defects of the property which are either a hazard to the property itself or to potential occupants it is generally a good idea to ask the seller to correct these items. These items are typically things like smoke and fire detectors (missing or over 10 years old), carbon monoxide detectors, any problems with the mechanical systems of the house, such as plumbing, heating, and electrical, and problems with the roof or foundation. Generally, you would not ask a seller to replace a light fixture unless it was damaged or nonfunctional. Likewise, you wouldn’t ask for fresh paint, new cabinetry, or countertops. If you feel like you are paying too much after inspection you may want to consider asking for a reduction in price or if you are utilizing a mortgage to finance the purchase you may want to ask for a seller concession to be applied to closing costs, prepaid and escrows. In either case, this will help reduce cash outlay at acquisition allowing the buyer to preserve some reserves, and necessities as they become apparent.