Out-of-State Investor - How to Handle Bad Items on Inspection

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Out-of-State Investor - How to Handle Bad Items on Inspection

Kyle Steiner
Investor · Orange County, CA · Member since 2015 · 30 posts · 9 votes

I'm an investor from California and I am under contract on a 4-plex on a property that is in Tennessee.  I just received the inspection report back and there are some items that give me pause on moving forward.  The market is super hot right now and I have been searching and offering on properties for several months at this point so I am eager to close.  However, I don't want to be stuck with a money pit.  

I want to get bids for the issues identified in the report but contractors are busy and even if I can get one to come out for a bid, it is difficult to let them in to look at the place given that it is 100% occupied. As a result, I don't know if I will be able to get bids for the major items prior to the expiration of my inspection period which is about 10 days from now. 

I really don't know how much all of the big items are going to cost (i.e. roof, plumbing repipe, electrical) and I don't know what is important to fix today and what can be fixed later. Also, if I'm going to fix it later, how much time should I give myself so I know how to calculate a reserve amount each month? I don't want to have a place that is in a state of disrepair but also don't want to break the bank fixing every little thing.

I'm posting here because I want to get others' opinions to find out if I am being too picky.  Also, I'm looking for how others have overcome this problem in their own investing.

Here's some background on the property:

Pros:
Each unit has in-wall A/C units that are fairly new.
All 4 water heaters are less than 4 years old
All 4 electrical panels have been rebuilt
5 minute drive to downtown

Cons:
Built around 1950 so some items are showing their age.
No washer/dryer hookups in unit, no on-site laundry

Minor issues (in my opinion):
Damaged siding
A few small areas of wood rot

Issues I'm concerned about:
Roof:
Roof deterioration - Roof age is 14-16 years
Roof sealant at ridge caps, flashing, and accessories should be resealed
Rafter sag - this caused the roof to sag in certain areas, which my inspector said is typical for older homes that have no collar ties installed.
Attic access was sealed off, caulked and painted over by the current or a previous owner.  There is no way to access the attic without cutting a hole in the ceiling.

Electrical:
Electrical wiring includes copper, aluminum and cloth sheathed.  Electrical is ungrounded as it was not required at the time the property was built.

Plumbing:
Galvanized Pipe used for distribution piping - my inspector says this can contribute to low pressure, rust colored water and may need to be replaced in the near future.
The property still has the original cast iron drain pipes which have an average life expectancy of 40 to 50 years.  According to the inspector, they corrode from the inside out.  The property is about 70 years old at this point.
The water heaters, while not very old, already have rust/corrosion on the top and bottom of the tanks.  I think there might be high humidity in the basement area where they are installed and that they could fail prematurely as a result.

Financial Summary:
I am putting 25% down and will be securing a 30-year fixed mortgage. With current rents, after my fixed expenses (PITI + Property Management), I will have about $675 of monthly cash flow (this assumes no repairs or maintenance), which obviously, there will be repairs needed. The rents can be raised an additional $70 to $100 per unit over the next year or so. After rents are raised (which will probably take $12,000 total in cosmetic renovations) , I'll be around $950 per month positive before capex, repairs and vacancy.

I'm interested to hear everyone's thoughts and advice!

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Most Popular Reply

Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
6y

@Kyle Steiner for a building of this age, this is a pretty typical inspection report.

Roof deterioration - Roof age is 14-16 years
Roof sealant at ridge caps, flashing, and accessories should be resealed

The question is how much life is left, three tabs last about 18-22 years, dimensional about 25 to 35 years, depending on weight, quality and installation. If you have less than 3 years left you can make a good case to ask the seller to replace before closing. Caulking with a quality roof sealer like Vulkem is inexpensive.

Rafter sag - this caused the roof to sag in certain areas, which my inspector said is typical for older homes that have no collar ties installed.

How many layers of shingles? The additional weight is an issue, if more than one layer a tear off is in order next time, that will lighten the load. They did not use trusses, but framed roofes on site. Installing additional struts is not that big of an expense.

Attic access was sealed off, caulked and painted over by the current or a previous owner. There is no way to access the attic without cutting a hole in the ceiling.

Not acceptable for inspection, seller needs to give you access. Takes a box knife. You will probably find: low amount of insulation, bathroom vents terminating into the attic instead of outside, otherwise you'll see some mold (not a big deal in an attic, just get it properly ventialted and stop the supply of bathroom moisture)

Electrical:
Electrical wiring includes copper, aluminum and cloth sheathed. Electrical is ungrounded as it was not required at the time the property was built.

Typical for the age, most likely you have BX cables and can use the metal armor for grounding, so all you have to do is swap outlets and tie the neutral to the metal box. Not required, but I would do it.

Plumbing:
Galvanized Pipe used for distribution piping - my inspector says this can contribute to low pressure, rust colored water and may need to be replaced in the near future.
The property still has the original cast iron drain pipes which have an average life expectancy of 40 to 50 years. According to the inspector, they corrode from the inside out. The property is about 70 years old at this point.

The plumbing is past it's design life and sooner or later you have to replace it with pex. Leave it alone until it causes issues like low pressure or multiple leaks. Almost every four family I have ever seen from the 1960 looks like that. Depending on the water quality it could live another decade or so, really seems to vary.

The water heaters, while not very old, already have rust/corrosion on the top and bottom of the tanks. I think there might be high humidity in the basement area where they are installed and that they could fail prematurely as a result.

You should not have to speculate on that; your inspector and agent should be able to clarify that. Any other concerns with the basement? Any water stains in the corners or on the floors, signs of surface water intrusion? If the building has no AC and probably laundry in the basement and moisture is going to be trapped there forever. Could be as easy as running a dehumidifier, which you should do anyway in the midwest. Water heaters life typically around 9-12 years, I have replaced some that made it to almost 20, but they don't build them like that anymore. I pay about $900 installed for a quality unit.

----------------------

In summary, it is difficult to give you solid advice without having seen the building in person. The condition seems to be very typical for what I have seen 100 times here in Milwaukee. No real shocker. What you can negotiate depends on the market. If the roof is really in it's final years, ask to have it replaced befroe closing. Get access to the attic and based on what you have found try to negotiate a closing cost credit. All that has to be seen in the context of how good of a price you have it under contract for.

A lot of people like them, but I am not a big fan of four family properties, because the rent per unit is relativley low, giving you a low rent to operating expense ratio, in particular capex, but also PM. The larger the units and the higher the rent per unit, the easier to pay for a new water heater.

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  • Christina Sieber
    Member since 2018 · 3 posts · 2 votes
    6y

    Hi Kyle,  have you identified a property manager yet? They might be able to get bids from their preferred contractors for you. The Nashville market has been booming for years and it's quite difficult to find a decent deal. I think go with your gut, the list above is already telling there are going to be many expenses which will eat up your cash flow. You estimate $12,000 in cosmetic updates in order to raise rent on top of additional upgrades and maintenance needed. That is $1000/ month to recover those costs while you'll raise rents $100/month/unit... to remove access humidity from the basement a dehumidifier is a good and reasonably priced solution. Radon and termites are a concern in Tennessee as well.

    1Reply
  • Kyle Steiner
    OP
    Investor · Orange County, CA · Member since 2015 · 30 posts · 9 votes
    6y

    @Christina Sieber Yes, I have a property manager.  I was under contract on another property and ran into similar problems.  They were able to get a quote on the roof that needed replacing but not on any of the other items that needed repairs.

    I'm not sure I follow what you're saying when you mention that it's $1,000/ month to recover the costs.  It seems like you might be saying that my $12,000 estimate for cosmetic repairs, divided by 12 months is $1,000 per month.  The way I look at the money spent on upgrades to increase rent is, what is my cash-on-cash return of the money invested.  

    If I can raise rents by $100 per month on 4 doors, that means I'll make $400 more per month, or $4,800 per year.  $4,800 additional rent / $12,000 investment = 40% cash-on-cash return, which seems like a pretty good return to me.  

    Of course, if large capital expenditures eat up all my cash flow and then some, there is a potential for being cashflow negative, which I would like to avoid.

    0Reply
  • Remone R.
    Auburn, WA · Member since 2017 · 305 posts · 88 votes
    6y

    @Kyle Steiner I have to be honest with you on this one from someone who has/had managed property out of state. This may be a waste of your money and time. It sounds like there’s way too many repairs for a 4 unit across country built in 1950 w/no washer/dryer hookups or laundry room, no attic access, sagging roof etc etc. if you lived in town and/or had a property mgr who had a maintenance/contractor team already then I’d say go for it. At least if you were owner occupying only putting down 3.5% fha instead of 25% you’d have more money for repairs. BUT if you really want this property I’d get an extension on the inspection contingency and get some quotes on the major repairs ie. roof and also have that attic cut out and inspected. Then negotiate some seller credits on the major repairs (as much as possible). Since your out of state it’s really in your best interest to find a good property mgr unless your willing to manage it yourself-which is doable. Good luck

    1Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
    6y

    Use HomeAdvisor - not to get bids, but if you search on the site they have an estimator tool for zip codes. Should give you a range of what it would cost to get the electrical and plumbing replaced.

    I'd also access the attic to determine why the roof is sagging. Don't be surprised if the roof joists are 2x4 instead of current code of 2x6. May need to sister & collar them to address roof sag permanently. 

    Run the numbers and only procced if the deal still makes sense. Don't talk yourself into this deal and overpay for someone else's problems!

    [email protected]248-209-6824
    Logical Property Management4.9469 Reviews
    WebsiteView Page
    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    6y

    @Kyle Steiner for a building of this age, this is a pretty typical inspection report.

    Roof deterioration - Roof age is 14-16 years
    Roof sealant at ridge caps, flashing, and accessories should be resealed

    The question is how much life is left, three tabs last about 18-22 years, dimensional about 25 to 35 years, depending on weight, quality and installation. If you have less than 3 years left you can make a good case to ask the seller to replace before closing. Caulking with a quality roof sealer like Vulkem is inexpensive.

    Rafter sag - this caused the roof to sag in certain areas, which my inspector said is typical for older homes that have no collar ties installed.

    How many layers of shingles? The additional weight is an issue, if more than one layer a tear off is in order next time, that will lighten the load. They did not use trusses, but framed roofes on site. Installing additional struts is not that big of an expense.

    Attic access was sealed off, caulked and painted over by the current or a previous owner. There is no way to access the attic without cutting a hole in the ceiling.

    Not acceptable for inspection, seller needs to give you access. Takes a box knife. You will probably find: low amount of insulation, bathroom vents terminating into the attic instead of outside, otherwise you'll see some mold (not a big deal in an attic, just get it properly ventialted and stop the supply of bathroom moisture)

    Electrical:
    Electrical wiring includes copper, aluminum and cloth sheathed. Electrical is ungrounded as it was not required at the time the property was built    .

    Typical for the age, most likely you have BX cables and can use the metal armor for grounding, so all you have to do is swap outlets and tie the neutral to the metal box. Not required, but I would do it.

    Plumbing:
    Galvanized Pipe used for distribution piping - my inspector says this can contribute to low pressure, rust colored water and may need to be replaced in the near future.
    The property still has the original cast iron drain pipes which have an average life expectancy of 40 to 50 years. According to the inspector, they corrode from the inside out. The property is about 70 years old at this point.

    The plumbing is past it's design life and sooner or later you have to replace it with pex. Leave it alone until it causes issues like low pressure or multiple leaks. Almost every four family I have ever seen from the 1960 looks like that. Depending on the water quality it could live another decade or so, really seems to vary.

    The water heaters, while not very old, already have rust/corrosion on the top and bottom of the tanks. I think there might be high humidity in the basement area where they are installed and that they could fail prematurely as a result.

    You should not have to speculate on that; your inspector and agent should be able to clarify that. Any other concerns with the basement? Any water stains in the corners or on the floors, signs of surface water intrusion? If the building has no AC and probably laundry in the basement and moisture is going to be trapped there forever. Could be as easy as running a dehumidifier, which you should do anyway in the midwest. Water heaters life typically around 9-12 years, I have replaced some that made it to almost 20, but they don't build them like that anymore. I pay about $900 installed for a quality unit.

    ----------------------

    In summary, it is difficult to give you solid advice without having seen the building in person. The condition seems to be very typical for what I have seen 100 times here in Milwaukee. No real shocker. What you can negotiate depends on the market. If the roof is really in it's final years, ask to have it replaced befroe closing. Get access to the attic and based on what you have found try to negotiate a closing cost credit. All that has to be seen in the context of how good of a price you have it under contract for.

    A lot of people like them, but I am not a big fan of four family properties, because the rent per unit is relativley low, giving you a low rent to operating expense ratio, in particular capex, but also PM. The larger the units and the higher the rent per unit, the easier to pay for a new water heater.

    2Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    I work with a lot of California investors. What I do is send them 5 inspection reports of similar properties before hand so they know what to expect. In terms of negotiating it depends on the deal and your market, your realtor should be able to strategize the requests no different then if you were a local buyer. 

    2Reply
  • Hank Walter
    Rental Property Investor · Minneapolis, MN · Member since 2018 · 28 posts · 16 votes
    6y

    @Kyle Steiner

    One of the things you should have nailed down as an out of state investor is a database of project costs or materials costs for your local area, prepared by or your team. It’s helpful to see what a rough cost is and compare it with a bid to see if they are shooting a fair or crazy price and can help limit always having to get three bids.

    That being said, look at what you can band aid for 6 months, for example if it’s summer and you know the heater needs work, budget for it during the summer and fix in fall before the winter rather than fixing right away.

    Roofs can be patched, depending on the severity, and work for another couple of years.

    0Reply
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