A common question from many beginning investors is “How can I tell by looking at a property whether that is going to be a good investment or not?”
First, let me say this: Most beginning investors should never ever, ever purchase a property that needs major renovations.
Never purchase a property that needs major renovations. Instead, your focus should be on buying properties that need a cosmetic rehab only.
Major renovations, in my opinion, are properties that need a full-blown structural rehab. For example: the walls in the basement are crooked and need to be redone by completely removing the wall and replacing it with a new one. Another big structural renovation is when you knock down walls to completely change the entire floor plan. Another big one is replacing the roof and all the rafters because the rafters are rotten.
These are major structural renovations. And no beginning investor should ever, ever look at doing such a renovation. Why? Because there is too much that could go wrong, and you could lose money.
Cosmetic Rehabs are Simpler and Safer
When looking to do your first flip, it is so much simpler—and safer—to buy a property that only needs a quick cosmetic rehab. And that consists of laying new carpet, painting the interior and/or exterior, re-laminating countertops, putting down new tile, installing new blinds, landscaping, etc. That is a quick cosmetic rehab.
As long as you’re buying cheap and you’re prettying up the property, you’re going to make a good profit. Yes, bigger profits are made when you’re buying a complete turnaround property that needs structural renovations, but you’re risking way too much money and you’re going to need more money up front to complete the job.
So just do a quick cosmetic rehab. Do not focus on the structural renovations.
With that said, let’s look at three of the major warning signs, or red flags, to look for when you are evaluating a property for investing.
Red Flag No. 1: The Roof
If the roof is shot and you can see the shingles are lifting up you most likely need to be replacing the roof. If there is any kind of curve in the roof that means the boards are sagging and there is potential for issues with the rafters. I’m no structural engineer, I’m no roofing expert so you’re going to have to get someone out there who understands the whole structural engineering process of a property to inspect the roof cavity to see if anything is wrong with the roof rafters.
Red Flag No. 2: Foundation Damage
Another warning sign is when you go into the basement and put your head up against the wall and see that the wall is caving in. What I mean by that is it’s not straight, it’s crooked. If there are horizontal cracks and pretty deep cracks that means it is structural damage. Do not get into a property like that because you could get into a lot of trouble, you can have major issues and it’s just a completely different type of renovation. You’re going to have to get a structural engineer to come and evaluate the walls to see what is going to have to be done to fix those walls.
Red Flag No. 3: Utilities
Most people find major issues in the basement (if the house has one), which is where the hot water heater, furnace or electrical panel are usually located. If you find that the furnace is old, you’ll probably need to replace that. And if the hot water heater is aging or the electrical panel is outdated, you’re going to spend a lot of money there, too.
Of all of those, I think the roof and foundation are the biggest renovation items you will find. Paint, carpet, kitchen countertops, vanities and bathtubs are quick and easy fixes. Your biggest expense—
your biggest money burner—are the roof, foundation, electrical, furnace and hot water heater.
About the Author
Engelo Rumora—“The Real Estate Dingo”—is a successful property investor, motivational speaker and serial entrepreneur who quit school at age 14, played professional soccer at 18 and now runs a multimillion-dollar real estate investment company. To date and against the odds, Rumora has been involved in more than 350 real estate deals equating to $50 million worth of transactions. He also successfully founded and runs five businesses in Ohio, including List’n Sell Realty, a Toldeo-based real estate brokerage that aims to be the #1 discount broker in the country offering an innovative, “first of its kind” referral program. You can follow him on social media at https://www.facebook.com/TheRealEstateDingo/ or https://www.facebook.com/engelorumora.