This isn’t the end. This is only the beginning. I want you to keep me posted on your progress because my goal is to have everybody into a property ASAP. You’re getting close. You’re talking to lenders, you’re getting your ducks in a row, and you’ve identified properties. No worries. I isn’t going anywhere. The purpose of this whole module is to zero in on specific activities associated with buying multiple rental properties. This is not all the associated activities. We are not covering financing, building your team with inspectors, realtors, bankers, and appraisers, and all that stuff. There is a separately focused course for those subjects.
You can also take Rental Profits without the Pain, the instructor lead course. It is ten weeks of interactive instruction with Q&A.And more importantly; you are associating with other investors who are doing exactly what you are doing. You share information, which is an awesome way to learn. I highly recommend it. Now we are going to talk about the physical analysis of the property. You have identified the properties you are going after by doing your desktop analysis. You have done everything so far online on your computer and over the phone. You have not even stepped out of the house, gotten in the car, and driven around yet. You have probably narrowed properties down from 300 to about six at this point. That is great because these six properties are the ones you have determined to have the greatest likelihood of profiting you. This is how you do this business. Other people teach you to go out there, look at everything, and make offers on everything. They do not care about the list price or how low the offer is.
That is crazy! It is very ineffective and it is a great misuse of your time. It is a shame that is being taught, but it is. Instead, I’m teaching you to take the high percentage shot. You will have a greater probability of success with this approach than any other. It is common sense; it is blocking and tackling.
We are talking about the physical analysis of a property. When you get out there, you want to be prepared. You are going to meet your real estate agent. If they are worth their salt, hopefully they will go through the property with you. Our guys are worth their salt. They know how to look at all the parts of a building to help you see things that maybe you do not see. We will go through a rehab sheet here literally line by line. I am going to walk you through exactly what I do when I look at a property. Here’s my Rehab Analysis Form:
The first thing I do is identify the property. Enter the address, the owner’s name, age of the property, contact information, and who is involved there on the form. With the high level stuff, we are looking at the rehabilitation and inspection costs. You should never have to do this yourself, but if you do, you will pay for accounting fees, advertising, legal fees, an architect, loan fees, insurance, permits, and all of that kind of stuff. That would be if you were really doing a rehab project.
Most of what we are talking about here are already rented properties, up and running, in service, and showing a cash flow. You should not have a lot of the items you see listed here, and certainly not architecture fees.
Let’s go ahead to the interior. From broad to narrow, look at the kitchen appliances.How are they? We are talking about the stove, refrigerator, dishwasher, washer, dryer, and microwave. You need to make a note whether they are good, fair, or poor. If they are poor, they should be replaced. Make a note of the total for the appliances. Then we are going to talk about the master bedroom, the other bedrooms in the house, the bathrooms in the house, and the den. Don’t worry. There is more detail further down the form.
Essentially, you want to make broad notes. It might be that the master bedroom needs new carpet and needs to be painted. You can write that stuff in. Make notes of what has to be done in the bedroom. Later we will tally these things up; we will qualify and quantify them.
How are the doors? How are the doorknobs? How are the doorframes? How are the windows? How the heat is registers? Make notes through all the rooms, the master bedroom down to the den. Look at the family room, the halls, and floors in general. Make note if you need to replace the kitchen floor. If it has old vinyl that is torn, replace it. I like putting tile down. Even in my rentals I put tile down because it is more durable. If you are buying in a bigger building, is there an elevator involved? At this point you are probably not involved with buying buildings with elevators. However, some of you might be. Check the water heater or heaters, water softeners, boilers, air conditioning, and the heating system.
Down to the nitty-gritty, here’s what I’m looking for. Does the refrigerator have rust on the outside of it, are the gaskets (the seals that goes around the inside of the refrigerator door and the freezer door) highly damaged, is the inside missing shelving? If so, do not spend money on that refrigerator. It will cost you more to repair it than to get a new one. Replace it. It’s the same with the dishwasher. Look at the inside. Are all the parts there? Are there signs of rust? Is there mold? Is the seal damaged or are there signs of water stains below the dishwasher?
What about the washer and dryer? I normally do not supply those on my rentals, but if they are there, you want to take a look at them. If they work, you want to leave them. I have told people with regard to washers and dryers, “I am going to leave these here, but if they break down, you have to pay for it. I only supply refrigerator and stove.”And the same thing with a microwave. Microwaves are easy. You plug it in and you test it. If it works, it works. If it does not, it does not. You need to tally this stuff up. A refrigerator can cost anywhere from $400 to $4,000. On a rental I might spend $600 on a decent frigand $400 on a stove.
Back down to water heaters. These have gone up in price over the years. They can be kind of expensive now. It could cost you $600 to replace a water heater. I use good water heaters and I want them to last a long time. With water heaters, there is always a top rim and a bottom rim. Look around the rim to see if there are signs of rust or corrosion. That is usually an indication that the lining inside has been breached. If the tank does not have to be replaced now, it will soon need to be.
Mark it down: new water heater, $600. Again, that is just a broad figure. It could be $400 depending on the contractor you use and the type of water heater he installs. Water softeners are important in certain parts of the country like Florida, for example. With boilers, if you have a hot water heating system, it has to boil. Again, look at the boiler; look at the outside. Are the left and right side panels bowing out? This is a sign that the reservoir in there has frozen and expanded and probably cracked. Are there signs of corrosion anywhere? Are there signs of rust? Is there a white sulfur buildup? That is actually a calcium buildup. Look at the valve on the right hand side; look at the regulator. Look at the copper pipe surrounding it. If it looks suspicious, assume you will have to replace it. Later on you can have a guy look at it. If he tells you, “Hey, this thing works great,” you can leave it. Better to be safe than sorry, though.
Next we have air conditioning. I generally do not supply air conditioning unless I am in areas like Florida, Texas, Georgia, or those southern areas that get hot and humid. You kind of have to have some air conditioning there. Look at the outside of the unit. If it is really rusted and corroded, you may want to replace it. With the heating system, if you have a forced-air, gas system, you need to be careful of a cracked heat exchanger. Back in the old days, heat exchanges did not crack. The ones they make these days crack and when they do, you have to replace the entire system. You cannot just replace the heat exchange.
With the electrical system, I do not like knob and tubing. Knob and tubing is when you see those white ceramic knobs and the thin, black wiring going through them. This is called your tubing, so knob and tubing. This is no longer up to code. It is okay in most areas if it is in the walls, but if it is readily visible in the basement, you need to replace it. It is also a non-grounded system and not very safe. I like seeing Romex wiring which is the white-encased, insulated wiring. It is three-wire: hot, neutral, and ground. Typically you can also have four- and five-wire systems depending on whether you have a 120 line, a 220 line, a 330, or a 440, for example. Nowadays most properties will need at least a 100-amp service. With old buildings that have 60-amp service you will not be able to do much improvement on those systems. If they are okay, keep them. If they are not okay, replace them.
With plumbing, I always look to see what kind of plumbing is there. If there are a lot of old lead lines, it is usually not a good thing because they have lead in them. You want to see more copper. I also like the new pex lines. For waste lines, if you have the old cast iron, just be forewarned. You may be replacing it at some point if not already. I like the new, black ABS pipe. It means it is new; it has been replaced; it flows more easily; it is more easily cleaned out. Look for this kind of plumbing in a building.
Is there a fire-protection system, particularly in an older building? Is it hard-wired versus an old battery-operated system? With regard to furniture and fixtures, forget furniture. With fixtures, however, look at the plumbing fixtures on your tubs and your sinks.
Check them out and make sure they work. Are they old and corroded and leaky? If they are, replace them. Flush the toilets. Put a wad of paper in there and see what happens to it. If it does not go down, does not go down easily, or clogs up, you may have an old toilet that needs to be replaced. You want to calculate that. You can probably replace a toilet for about $400 for a decent one. You can get cheaper ones and replace them for less, but $400 is an average of what you are going to spend.
Plumbing rates can vary depending on where you are in the country. It can be anywhere from $30 to $120 an hour. It is all over the map. You can get a pretty good guideline by calling your local property management company and asking them what hourly rates they pay for plumbers.
In any case, let’s look at the exterior. With the roof, look for bent shingles, shingles that are curling up, shingles that are missing and shingles that look pitted. You do not have to climb up on the roof with a ladder. You can take a pair of binoculars. Part of every good investor’s kit is a good set of binoculars so you can see the roof in detail from a distance. Look for pitted roofing. Again, you will be able to tell by looking at that roof and then looking around at several other roofs in the neighborhood. You will be able to determine an old roof versus a new roof.
Look for water stains inside the property. Look up inside the ceilings in the closets in the upper rooms of the upper floors of the building. Look for signs of water leaking through, particularly around windows and doors. In fact, look at the windows and doors. Are they the old wooden sash windows with the single pane? There will be problems with those windows. You want to look for properties with new vinyl or vinyl-clad double-paned windows. Look for windows made in the last 20 years or so. There are good wooden windows out there. Even today they make them new that are wooden. However, if you have old windows with the old chain and sash rope, just be forewarned. Down the road you may be looking at replacing those.
For exterior doors, I always like to use steel doors. In some areas, in some properties, in some neighborhoods, you might have a really good, solid wooden door. That is okay for an exterior door. I just like the insulated steel doors better because they are lower maintenance. They are easier to maintain and they hold their form. Wooden doors over time will tend to warp, crack, and do all kinds of stuff.
With walls and trim, you want to look at the wall surfaces. Do you have old plaster walls? Do you have plaster ceilings? Look for cracks; look for pieces of plaster coming down. Be forewarned. If you see that, you may be replacing it. You may be ripping that plaster down and replacing it with drywall. It can be a big job. If the plaster is in good shape, leave it, by all means.
Look at the trim work. How does the trim look around the windows, the doors, the closets, the baseboards, and up around the crown molding if there is any? If you see any missing or broken or cracked you have to figure in $10 a foot to replace it. That is parts and labor. Again, this is just an average.
How does the garage look? How does the floor look? Is it cracked? Is it missing a lot of concrete and broken up? How is the garage door? Is there a garage door opener?
The chimney is a bigger. You have to look at the outside of the chimney first. Look for leaning chimneys. Look for chimneys with bricks missing, particularly up at the top. Look for missing chunks for mortar and factor it in if it needs to be repaired or maintained.
How about the yard and the landscaping? You want to see a decent set of grass. I know if you are in Southern California, you have no grass right now because it all burned up. In most parts of the country, though, you are going to have grass. Is it full of weeds or is it decent grass?
How about landscaping? Do you have shrubbery? Make sure it is trimmed up and cut back and not right up on the house. That can cause problems later on.
I do not advocate buying properties with wells and septic tanks. In certain parts of the country you still have those, but I would try to avoid them if at all possible because of all the Clean Water Act regulations that really changed things.
In bigger buildings you will have sprinkler systems. You can test them; they are easy to test. Look for signs of leaking. They are under high pressure, so look at the unions and the joints and the elbows. Make sure you do not see any signs of calcium buildup.
How about the driveway and the walkways? Look for cracked, broken up, or missing chunks of concrete. Those slabs have to be replaced. They will not pass inspection. On an average section of sidewalk, one slab that is maybe three feet by four feet, you might spend $300 to replace it when the process is all said and done.
Is there a porch? How are the columns holding up the porch? How is the porch ceiling looking? How is the porch roofing looking?
Is there a fence? I personally do not like fences. If they are there and in good shape, I keep them. If they are not, I take them down. I will never repair or replace a fence. I will just take it down.
I do not advocate buying properties with pools. In the end you will regret it. Trust me; just do not buy properties with pools. If you have to, that’s great, but go ahead and be forewarned. It will be a big expense and a liability. It will cost you more in insurance. There are all kinds of stuff going on there.
Make sure if you have any steps that they are up to code. Make sure the risers and the treads are all up to code, the dimensions, and they are in good shape.
How about lighting fixtures? You want to have decent lighting fixtures that work. You should test them all out. When you go to check out a property, make sure you take light bulbs with you in case there are missing light bulbs. You want to make sure the fixtures actually work.
You want to add all of this stuff up. Let’s say you buy a property that needs work, it’s empty, or it has been poorly managed. You want to determine what the place really should rent for. Add all that up and do your own projections, taking into consideration what the current guy has been charging. If he is mismanaging it, I would take his figures with a grain of salt. Based on the cap rate in the area, you calculate your purchase price on the property and then back off of that amount the cost of all of the work you’ve listed. Let’s say you add this up. Perhaps the building should be worth $120,000 at a 10% cap rate (substitute the cap rate for the area). If it needs all this work, you back that dollar amount off your offer price.
Knowing what to rehab, how much you spend and how far you go with it is moving target. Always keep in mind that you are not going to be living in this building… tenants are. You need to rehab according to the market that your rental property is in. This means the socio-economic market. Don’t put $50 a yard carpet in a rental that is located in an upper low-end neighborhood. Likewise don’t put indoor/outdoor carpet in the living room. This is a skill you will develop over time. My intention here is to shorten the learning curve and help you avoid as much expense as possible. So let’s go over the basics. First we’ll discuss carpet since we mentioned it above. In these rentals use a good brand name like Shaw carpet. Get a very neutral color like Candy Truffle. I call it the color of dirt. And it looks nice! Get the lowest grade or weight. Then put underneath of it a middle-grade pad. This is one of the secrets. A better pad will help the carpet last longer. The color will hide a lot of crud. It is appealing to the eye. It also has a 10-year warranty and is a standard in the rental business. I think Shaw Carpet owes me some love. What do you think?
When it comes to painting always use a good paint at least as good as Behr. Stick with one color for the wall surfaces, like off-white satin, and one color for all the trim, like white semi-gloss. I like the two-tone look and I always use semi-gloss on trim. You can use flat paint on ceilings and even walls if you’d like, but the challenge with flat paint on walls is that it doesn’t clean well and you will have to repaint more often. You can also use a more appealing very light neutral color on the walls other than off-white. The two-tone look is appealing and doesn’t cost that much more. Hiring a pro to do the painting is a must. They’re better and faster than you and I—and your time is much more valuable than theirs. You will be using that time to find more deals. When it comes to plumbing fixtures don’t make the mistake everyone else makes when they are first starting out—buying cheap plumbing fixtures. If you pay $29 for a kitchen faucet you will get what you paid, and it will be crap. There’s an old saying in plumbing, “If it isn’t heavy it isn’t good.” If you buy a plumbing fixture loaded with plastic, it will be a waste of your time and money. I like American Standard products. What you and I can get off the shelf at Home Depot is the same one the plumbers get from the plumbing supply house. This is not true of other manufacturers. Also, American Standard’s warranty is like gold. No fuss no muss.
If you have a problem they take care of it. But, you won’t have a problem. Their products stand up to a lot of use and abuse. I think American Standard owes me some loving’ too!
Don’t go cheap on windows. For rentals I use American Craftsman. They are good, double-hung, double-pane, and all vinyl-clad windows with a good long and solid warranty. If you get the cheapness you will be wasting your time and money.
*For more information on this topic, see “Turning Rental Pain Into Real Estate Profits”*
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