A cautionary tale to heed…
In trying to answer the age-old question, “is real estate a good 
investment?” I’d like to submit this little tale of woe about the “professional” property investor who thinks he knows what he’s doing. I recently showed a house an investor had renovated to a young couple I represent as a buyer’s agent. The house was a simple 1915 Cape Cod style home. For the most part, the investor had done a fairly decent rehab job on the property. He claimed to have done all the work himself. This is a rarity. In my experience, most people who invest in homes traditionally create their own crew to work with from project to project. Not this guy.
Self-selling investment properties?
On top of this, he was selling the house himself. Turns out he had listed it with a real estate agent a year earlier, and committed the
deadly sin of overpricing from the get-go. So it just sat there. No offers. No nothing. He kept reducing the price several times. Ultimately, after six months, in the dead of Winter, he took it off the market. And in the Spring, he placed it on the market by himself, with a much lower, more realistic asking price. Problem was, he was still over-priced for the market and the work he had done. But I could tell he had boxed himself into a corner. He was trying to price the property based on what his costs were. Not what the market would bear. So, basically, he was sunk.
The finer points of owning an investment property
As he showed us the house, he also proudly showed his Building Permit and 
final Certificate of Occupancy he received for successful completion of the project. Check…and check. At least the town felt it safe. So why didn’t I? Most times, I can forgive stupid-looking remodeling work. This guy had redone everything. But his upstairs full bathroom offered the tiniest of a vanity, while utilizing a five foot wide shelf for….I have no idea. It was free form…unconnected to anything. Stupid. But you know, investors can be stupid and still make money on their flip projects in spite of themselves – and their lack of understanding of what buyers really want.
This guy was an idiot, however.
We went down into the basement, where he had a brand new boiler,
water heater and well tank and pump. All were on raised blocks. The concrete flooring was all newly done. Looked great. New solid support beams on the new concrete. Fantastic. And a huge pond of water on one side of the basement leading to nowhere. Oh – and a lovely sump pit with new sump pump doing nothing, sitting on the other side of the basement floor… “Oh, that – probably coming from the well outside,” he volunteered. WTF????
Learning the hard way…ouch
So what does it take to be a property investor, preferably a good one? Well, not what this guy did. This fool had spent easily over fifty thousand dollars on the renovation, but he allows his support beams to get drenched from some major water problem he did not choose to 
address? He claimed to have been doing this sort of rehab work for many years on many different projects. I don’t see how. For a few thousand dollars more, he could have installed a French drain in the basement, solving his water problems. (A French drain is a basic interior drainage system.) Now, any buyer’s home inspector is going to send out red alerts about what major water issue could be confounding the property surrounding the house. Could be a high water table. Could be a well leak. Could be any number of things. A French drain would by an easy solution. Instead, he does all this work, and has trouble selling his investment property, due simply to his stupidity.
And he’s still trying to sell it…
Let this tale of woe be an example to any beginner property investor. This particular investor may know how to do renovation work himself 
(and clearly, not all renovation work). But he knows nothing about marketing a house. Indeed, he also knows nothing about identifying what buyers in his area are truly looking for. If he did, he’d know what to give them. In addition, he’d know his target market, their price range, and the price his renovated house would need to sell for – before he ever acquires the house to flip! In so doing, he can best plan his renovation work, materials needed, and work to be done, so that he can price based on the marketplace – and not on what his overall costs end up being. Certainly in his case, and sadly at that, he will most definitely be taking a substantial loss on all his efforts.
Beware older home rehab projects
As in this example above, older, period houses usually come equipped with renovation costs that can skyrocket out of control very easily. Costs that the average property does not share, and that you may not properly account for when you crunch your numbers, and come up with your overall rehab budget. It would be sad indeed to purchase an older house at a great price, only to discover you’re sinking in red ink as your fix-up costs spiral out of control, and way beyond what you originally planned on.
Do you have the business acumen for older homes?
I have written in prior articles here about purchasing older homes, and their pitfalls. I have noted that any property investor should “consider what an older house brings to the table: sash windows that are thin by
today’s standards, and also are quite leaky – producing many drafts, thereby increasing your heating costs. Also think about the costs of rewiring hundred-year-old electrical wires and circuits throughout the house. And how about replacing antiquated plumbing lines and fixtures as well. On the whole, your repair costs could run 25% to 50% higher on an older property than on a newer one.” I have gone on to recommend that the best investment property search results can usually be found through investing in newer houses that need less repair work to begin with, and which will cost less to maintain in the long run.
photos courtesy of mistakes-kristinandcory.com, realtypin.com, sheetsdesignbuild.com, flooddamagetoronto.com, minnesotabasementrepair.com, lawofficewalterjennings.com, aspectestateagents.com, metrosdrealty.com
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after my generation’s death-defying leap into the unknown world of cancer-causing agents, the federal government, in the guise of the creation of the Environmental Protection Agency (EPA), started listing asbestos as a known carcinogen. Oops.
Environmental Protection Agency (EPA) began regulating materials containing asbestos. The fire retardant material can most commonly be found in buildings, but also in gas heaters, hair dryers, some clothing and automotive brakes. Walls, flooring, pipes, textured paints, insulation, fireproofing materials, pipes, electric wiring, and even chalkboards constructed between 1920 and 1989 may contain asbestos. If the building was constructed between 1920 and 1989, chances are something in the building was constructed with materials containing the material.
a serious health risk when its fibers become loose and airborne, since breathing them in can cause scarring of the tissue lining the lungs (causing mesothelioma) and even lung cancer. You can check for signs of asbestos on your own, but testing should be done by a certified professional using special equipment. If asbestos is present, hire a contractor to repair or remove the materials that contain it to ensure the safety of yourself and people using your property. Trying to do asbestos removal on your own is not only illegal, it’s really, really stupid.
of the esophagus are thought to increase with increased exposure to asbestos. So, rather obviously, you’d want to avoid it like the plague.
degrading. Asbestos isn’t dangerous when it’s still in good condition, but when it starts to break down and the fibers are released in the air, it becomes toxic. Look for signs of older materials that have become worn out or damaged.
– and an immediate danger to anyone breathing in that basement. If you’re still not sure whether the investment property you’re scouting out has asbestos-lined pipes, a home inspector can determine it for you. Also, licensed asbestos handling companies can not only tell you if there is any asbestos in the house, but what condition it’s in as well. And they are the only ones that can legally remove and dispose of the asbestos.
(encapsulation) of the asbestos. However, if the property is a foreclosure, or a short sale, the owner may not be able to perform the remediation, and you’ll have to include the removal as another cost of purchasing the property. It’s always best to have the asbestos removed, rather than encapsulated. While encapsulation is certainly less expensive than removal, you could have an issue when it comes time to sell the property. After all, what happens if a water pipe that was encapsulated develops a leak? In that eventuality, the asbestos will have to be removed in order to get at the pipe. And most buyers will not want to deal with that possibility. So removal makes far more sense than encapsulation.”
of the most common, and most expensive problems results from termite damage. But are you an expert at finding the signs of termite damage? (I didn’t think so…)
from termites – or other potential hazards not easily seen by the untrained eye. I have noted in prior articles here that “the property investor must be aware of these most basic of environmental hazards that lurk within any potential property deal…especially with abandoned houses. And you’ll need to plan for the potential costs of remediation if needed. Just know that these costs can be extremely expensive to take on when you’re making that seemingly wonderful “steal” of a deal on any abandoned property. And that could mean a major financial disaster for you if you don’t plan accordingly for the worst.”
make sure you get a very experienced house inspection company to go over the property in tremendous detail…you’ll have to build in a slush fund for the probability that one or more of these hazards (such as termites) are present. Crunch your offer numbers accordingly…
that termites can damage laminate flooring and even skirting boards. Affected flooring may blister and sag in certain areas and checking underneath the flooring may help to uncover termite activity. You can also check if floors feel more spongy than usual. In addition, look for unexplained cracks on internal walls. As termites consume cellulose found in timber within walls, the visible cracks could be a sign of termite activity inside. Don’t forget to search out wooden ceilings, beams and rafters in attics – they’re just as much at risk of termite damage as wooden structures located nearer ground level. Look for cracks on ceilings and cornices too.
blocks and from there gain access to floor joists, which are still made out of wood. Homes with crawl spaces appear to be at greater risk of damage as their foundations are still traditionally made out of wood.
Let’s face it – if you’re just getting started as a novice property investor, and you locate a potential steal of a deal that needs some degree of work, you’re probably considering whether to use a contractor or a handyman. Naturally, you’d expect the handyman, the jack-of-all-trades fixer-upper who can repair just about anything, to come at a cheaper price than a contractor. You may be right… Or terribly wrong by the completion of your project. And only time will tell if you choose incorrectly, Grasshopper….
best to work with a contractor – or at least, a carpenter to act as your right hand man in all construction and rehab decisions. Handyman services tend to generally fall within the purview of more cosmetic repair services, like painting, light (and I emphasize the word “light”) carpentry, small plumbing repairs as well as light (there’s that word again) electrical work – such as replacing a light fixture.
could do multiple disciplines, including carpentry (his specialty), plumbing and electrical work. Naturally, I thought I could save handsomely by using his services. And since he was referred by someone I trusted, I felt I couldn’t go wrong…
pace, the project became, as they say in game theory, the “prisoner’s dilemma.”
property management concerns. A leaky toilet, a light that stops working, an apartment that needs painting…All light duties. If you are doing the property management duties yourself, certainly you can line up a handyman to perform these duties – this will certainly save you money in the long run relative to a contractor’s services. However, as before, let the handyman gain your trust by starting them off on small projects, one at a time. See how prompt he is, how courteous he is to your tenants, how he treats your property in general (does he do more damage by his presence than he fixes?), and also, is he intelligent enough to know how to save you money? In addition, make sure he’s not padding his hours. Ask him ahead of time what he feels the job will require in terms of his time, if you’re paying him by the hour. He should have some ballpark estimates. If not, use someone else!
should use him exclusively for all your properties. You will gain an ally in the process. And this will not only save you time and money, it will save you your sanity as well. Also, keep in mind that if you are using the services of a property management company, you should designate what handyman they should be calling when tenants call in for repairs. Your property manager will take their marching orders from you as to the right handyman to use to help save you money. Of course, this will end up incrementally saving you considerable amounts in the long run, especially as you continue to acquire more investment properties.
to investing. As I have mentioned in a recent article here on the abandoned properties game, “if you’re into high-risk property investing techniques that may return higher yields than the more traditional forms of property investing, then by all means consider investing in abandoned property.” I have also said that since these are typically houses that have fallen into disarray due to owner neglect and ensuing abandonment over a lengthy period of time, they will not be on the market for sale. So your real estate agent will not be able to help you out in your searching. In fact, locating a potential money-making abandoned property will eat up much of your valuable time, since you’ll have to do all the search work yourself. However, if you happen to pass by areas with what look to be abandoned houses, then by all means try using these techniques to scope them out further to see if they can be potential cash cows.
reference back to them later, as you cull through the most viable ones for investment. In addition, be wary of going inside any abandoned property without permission. Abandoned property law still considers it trespassing if you don’t have the express OK from the owner to go inside.”
utilizing well systems for their drinking water, wells should be tested every two years for potability. It’s possible for coliform to accumulate, and your body can get used to this harmful bacteria. Well testing would determine the level of this bacteria in the water supply. And coliform problems can be rectified with simple chlorination of the well water. Potability tests can also uncover any potential problems with fecal bacterial levels. Sometimes older septic fields built too close to the well supply could account for this problem, and would need to be addressed.
property you’re scouting out has asbestos-lined pipes, a home inspector can determine it for you. Also, licensed asbestos handling companies can not only tell you if there is any asbestos in the house, but what condition it’s in as well. And they are the only ones that can legally remove and dispose of the asbestos.
Like lead paint, there are radon test kits that can be purchased at local home stores to check for the presence of the gas in the house. And home inspectors routinely check for radon gas as well by placing test kits in basements for a period of two to three days to get an accurate read on radon levels.
associated with tanks that develop leaks, and their subsequent removal and soil clean up. Before issuing any policy, the insurer will run tank tests (paid by you) to determine the current tank’s status for insurability.
