When considering an investment property it’s important that you know what not to repair.
Minor cosmetic repairs like new paint, carpeting and light fixtures allow you to easily boost your bottom line, but more involved repairs can quickly drain much of the potential profit from your investment and could even cause you to lose money on the deal — especially if you don’t account for all the repair costs in your purchase price.
But accounting for repair costs is not the whole story. You also need to develop a strategy for identifying what repairs and improvements are unnecessary and which properties are repair “money pits” that you should avoid.
“What may look like just a few minor repairs can easily turn into a nightmare if you do not inspect a house completely,” said real estate investor Lance Young, who writes extensively about evaluating repairs in a series of real estate investing eBooks.
Young offered the following guidelines of what not to repair in an investment property:
1. Extensive renovations in rooms other than the kitchen and bathrooms
Repairs and improvements to a property’s kitchen and bathrooms will provide the best return on investment, according to Young. While repairs to other rooms are often necessary and warranted, those rooms should not be the focus of your repair efforts.
“The kitchen is the most important room in the house,” he said. “When a couple walks into a house to possibly purchase it, watch how fast they make their way to the kitchen. That tells you all you need to know about paying special attention to this area of the house.”
2. Old heating and air conditioning units that work
In the world of home improvement, old is often considered bad. When it comes to repairing investment property, that motto certainly rings true for cosmetic features such as paint, carpeting and light fixtures. But many investors make the mistake of applying that same thinking to items such as heating and air conditioning, which most potential buyers and renters won’t care about as long as they’re in working order.
“I’ve bought a lot of houses with heating and a/c units that were nearly 20 years old. I have the unit serviced and if there are no problems I leave it alone,” Young said. “Some investors might try to replace an old heating and a/c unit like this. You’ll never get your money back out of it — it is just not something people appreciate as much because they don’t see it.”
3. Features buyers or renters don’t expect or want
The expectations of potential buyers and renters will vary somewhat depending on the location. You need to determine what those expectations are for your property and budget your repairs accordingly.
“You do not have granite countertops installed in a house in a working class neighborhood. You’ll never get your money out of an improvement like that,” Young said. “Conversely, you do not install Formica countertops in an upper-middle class home that has a grand kitchen. You would install granite or Corian because potential buyers will expect it.”
4. Foundational and structural defects
It’s not that you shouldn’t repair foundational and structural defects to an investment property you have purchased; it’s that you shouldn’t purchase properties with these types of defects in the first place unless you are prepared to take on some heavy-duty repairs or completely raze and rebuild. Signs of foundational and structural defects include large cracks along a basement wall, uneven floors and poorly built home additions.
“Overall, it’s usually a good idea to pass on houses that have structural defects. They are very costly to repair and in the worst cases cannot be cost-effectively repaired at all,” Young said.
5. Anything when a full inspection isn’t possible
With most investment real estate, such as pre-foreclosures or bank-owned properties, you are able to conduct a full inspection of the property because you are dealing directly with the property owner. However, there are some investment opportunities, such as foreclosure auctions, in which investors purchase a property “as is” without a full property inspection. Young advises novice investors to avoid auction properties — and the repairs that come with them.
“It is critical that you build in an extra margin for repairs before bidding on a property at a foreclosure auction, and that extra margin can be hard to determine unless you have experience sizing up properties without a full inspection” he said. “I do not recommend that a beginner attempt this unless he or she is willing to lose money on the deal.”