In my previous post, I discussed what to examine on the outside of a property to estimate your rehab costs. In this post I want to move inside. The inside is usually a lot more complex and thus has more components to inspect. You also have to think about how you want to repair them. How you repair items will often be based upon your intent for the property. Will the property be a retail flip or a buy and hold rental? Obviously, you may go a bit more towards the high end with a retail flip, thus increasing your rehab costs.
Examining the inside of a property is much like conducting a home inspection for a retail buyer. You are going to go through and look at all of the various components that make up the property. Remember to use your checklist so you do not miss or overlook anything. Here is a sample of the spreadsheet checklist I use.
Remember also that some of the components of the property may not be on or functioning. This is especially true with foreclosed properties, as the banks usually will turn the utilities off to save on the holding costs. So you have to be especially vigilant and know what to look for since you will not be able to test the lights, so to speak.
Here is what you should be looking at as you walk through your next potential deal.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
13 Items to Note on a Property’s Interior
The electrical system is one of the major systems of any building and consists of many differing components. Part of it is on the outside, but most is located on the inside. On the outside, take a quick look at the service, the weatherhead and meter box. Are the wires old, frayed and small? Does the entire system look dated? If so, you may need new or upgraded service, especially if you are planning to add things like a HVAC system.
On the inside the main thing to look at is the electric panel. Is it breakers of fuses? People freak out about fuses nowadays. Are there enough breakers to handle a modern load? Are the breakers old? What brand are they? There have been reported problems with Federal Pacific Breakers, for example. Take a look the outlets — do they have two or three holes? Two holes mean no ground wire and may be a problem when you go to resell. All of this sounds expensive, right? Well, it can be. A new electric service can run between $1,000 and $2,000, and a new breaker panel can double that.
This is another very important system. First check if the system exists, as copper is very likely to disappear these days. Don’t assume those pipes are there. Look for them. If the water is on, try every faucet and fixture. Does it leak? Flush toilets and let water run, then stop and listen. Hear anything, like drips or splashes? It should not be dripping, and it should be draining smoothly. If not, assume there are leaks and/or blockages.
Look for mold or rotten wood, as these are also evidence of leaks. Keep in mind your examination of the outside for dips and green spots in the yard. You may have leaking or blocked up sewer and water lines. Also find the water heater. How old is it? Is it working? Is it vented properly?
Is the system operable and in place? Is it old and in need of replacement? Are the ducts in place? Turn the system on. Can you feel air coming out of all of the ducts? Is the air cool or warm as it should be? Replacing or installing a new HVAC system is not cheap. Smaller sizes can be $3,500 or more, with larger, five-ton systems costing over $6,000 for a complete install.
Is it ’70s avocado green? Is it obsolete and in need of a complete redesign? Remember that kitchens (along with bathrooms) will often sell the property to both buyers and renters. So a clean, sleek, bright and well designed kitchen is a good place to invest some money. Kitchens can be really expensive, going for over $30,000 in higher end retail flips. However, a few thousand in a smaller rental can really go a long way.
Are they in place? Are they dated? If you are going for the retail sale, you are simply going to have to put in new appliances. In a rental, you can get away with nicer used equipment.
Are they pink, yellow or blue? If so, it is time to modernize. A nice bathroom can be done for less than $1,500 to $2,000, and I am talking about a complete gut job with new tub, sink, tile, faucets, everything. Do not be stingy here, however. Upgrade a bit if you can. A nice bathroom can really help sell the place.
Do they need repair? Are they full of holes or mold? If so, they will have to come down and be replaced. Look for the proper trim work as well. Every deal is also going to need paint — lots of it. Be sure and budget accordingly.
Look under that old carpet. Perhaps there are wonderful hardwood floors that simply need to be refinished. Will you need new tile in the kitchen or in other areas? What about carpet or perhaps installing hardwood? You will have a wide range of choices with floors. Do something nice that will stand the test of time in terms of both fashion and durability, and it will be hard to go wrong.
Will you need security doors on the exterior? Are all the doors and knobs in place on the inside? What about the locks on the windows? Are they there? Are they painted over? These little things can be easy to miss, but can also add up quickly.
Do you need new light fixtures or ceiling fans? What about bath and kitchen fixtures? Make a note of anything that is dated, missing or unusable, and budget accordingly.
Take a walk down into the basement. Does it smell moldy? If so, there is likely a water problem. Take a flashlight and shine it all around. Look for evidence of water along the floor, and look at all the joists you can see. Do you see any mold or evidence of termites?
Go up in the attic. You may have to look at HVAC equipment, but if not, go up there anyway. Look for insulation and look at roof joists. Also look for any weird wiring. Old knob and tube wiring, for example, while perfectly functional, is another thing that freaks people out.
This is a catch-all category for things not found elsewhere that may be unique to the particular property you are looking at. It could be window treatments or a particular molding, for example. Be sure to add an “oops” factor and if you can’t find an item, look for it. They have hidden it somewhere. Search.
As I stated in my previous post, being able to quickly and accurately estimate a rehab is one of the skills every real estate investor should have. Deals come and go very quickly, and you have to be ready to move quickly. Use these posts to develop your own rehab checklist so you can be ready when a deal comes along.
Investors: What items would you add to this list?
Let me know with a comment!