The 1 Area You Shouldn’t Skimp On Cost
You don’t want to cut corners here
Welcome to this week’s issue The Un-Normal Investor. Each week, I publish one 5-minute read that’s written to make you a smarter real estate investor.
If you don’t know where to start, or you’ve hit a roadblock along your journey, consider joining our private community.
You’ll have instant access to our chat where we answer each other’s questions and share referrals, live Q&As with special guests, and invite-only in-person events and dinners.
If you’re buying your first home or rental property, and you plan on purchasing an older fixer-upper, due-diligence is the one area that you don’t want to skimp out on.
Cutting corners in this category for the sake of saving $500, can cost you $50,000 in repairs and losses later down the line.
Here are the 5 different types of inspections that you should carry out during your due-diligence period if you want to thoroughly assess the condition of a property and minimize your capital risk.
FYI: I added 2 additional pro-tips at the end for those that are going after multifamily properties.
#1 Homeowner’s Inspection
Rough Cost: $400 - $600
A homeowner’s inspection will cover all of the interior of a property. The inspector will point out any issues, defects, or damage that may go unnoticed to an untrained eye. What’s most important is that the inspector assesses the functionality and remaining lifespan of the property’s mechanicals and high-ticket items - plumbing, electrical, HVAC system, and appliances.
#2 Roof Inspection
Rough Costs: Free or A Small Additional Fee ($50 - $150)
The roof inspection is sometimes included with your homeowner’s inspection. If not, the additional cost shouldn’t be too steep. The inspector will either walk the roof themselves - taking photos and making notes of any problem areas - or they will utilize a drone to assess how many more years the roof will hold up.
#3 Pest Inspection
Rough Cost: $100 - $250
Some inspectors will carry out the pest inspection, others will outsource this task to an exterminator. The focus of a pest inspection is to spot any rodent droppings or termite activity.
#4 Sewer Scoper
Rough Cost: $100 - $250
During a sewer scope, the inspector will run a camera through the sewer stack of the property to ensure that there aren’t any clogs, blockage, or breaks throughout the pipe. If there’s any damage in this department, you have grounds to request that the necessary repairs be made or a sizable concession be provided.
#5 Architect’s Assessment
Rough Cost: Varies But Expect A Base Cost of $200+
Calling an architect out to the property is only appropriate when you suspect that there are structural issues or potential problems with the foundation. Both of which can be a deal breaker depending upon the severity.
When Buying Multi-Family Properties
Now when it comes to multifamily, I add two additional steps to my due diligence process.
Reason being, I’m not only inspecting the condition of the property, but I’m also assessing the financial durability of the asset as well.
#6 Gather All of the Financials from the Landlord
I request all lease agreements from the owner, as well as a rent roll, and trailing 12-month income and expense table - aka T-12. These three sets of documents will tell me 90% of what I need to know. I should be able to discern: who’s residing at the building, how much money they’re supposed to be paying versus what’s actually collected each month, and how much capital is being spent on overhead, maintenance, and repairs.
#7 Speak To the Tenants and Have Them Sign An Estoppel Certificate
After I wrap up with the owner or property manager, I double check the information that I’ve been provided by speaking directly to the tenants. To do so, I prepare Estoppel Certificates for each resident. An estoppel certificate requires a tenant to establish in writing: the current status of their lease, outstanding rent balance, and whether or not they have any active claims against the landlord.
So these are the 5 - 7 different inspections and assessments that I carry out whenever I’m purchasing a piece of real estate.
I highly suggest that you do the same - especially if the property’s a bit up in age.
What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?
If you enjoyed this read, please share it so others can gain value as well.
For access to the Un-Normal Investor private community, live Q&A sessions with special guests, and our exclusive in-person meetups, dinners, and events, click the link below.