5 Major Projects Not Always Considered by Newbie Rehab Investors.

When it comes to any strategy surrounding buy and rehab investing (BRRRR, Fix & Flip, etc.) a big question I always hear is, “Should my first investment property be a big rehab or a small one?" A good question, maybe even one for a later blog post, but an investor should consider their tolerance level to risk such as the potential for rehabs to take unexpected and expensive turns.

A small, “cosmetic” rehab allows a newbie to get their feet wet, understand the work being done, and develop relationships to build their “core four”. It does leaves room for major, maybe undiscovered issues down the road though. On the contrary, large, “gut rehabs” leave no room for major problems down the road because you are, as the name indicates, gutting the property and essentially starting from scratch. But they can be very expensive and stressful if you’ve never managed a major project before, and an exit strategy is a little harder when your property has been stripped to the framing.

Which ever example you choose to go with is not for me to judge….yet 😊. This time around, I am here to provide some insight into some of the more major, and not always considered, projects that can take a profitable rental property asset and turn it negative quickly. I will also cover how to potentially spot some of these defects before it’s too late!

I am not saying that an investor should avoid a property with these issues. In fact, a witty investor can take this list and use it to their favor being that many people get cold feet whenever these following things need fixing or replacing. And while I am based out of San Diego, California, these projects apply to any state or rehab strategy.

Here are 5 major projects not always considered by newbie rehab investors.

1. Roof and Foundation

I thought about separating these two, but they are more obviously expensive than other jobs, but are certainly worthy of mention. Anytime a property has a bad foundation or roof (more so the foundation), the seller is in trouble and most competition heads for the hills. Depending on the amount of repair needed, a new roof will cost you around $10,000 and foundations can get up into the $50,000 range. Thankfully, in your typical real estate transaction with agents involved, these are usually the first two major question marks before committing to close on a property.

Don’t allow these numbers to scare you though. Discovering these issues can put an investor in a more powerful position than before. You can ask the seller to fix the mistakes before closing, and on their dime too. But in reality, most people aren’t willing to front the whole bill, and will provide a partial credit to the buyer toward the cost of the repair. Of course, a lot of it will depend upon the motivation level of the seller. If they just want to get that property off their hands, they may just end up paying for the whole thing.

When walking a property, keep an eye out for indicators that a property suffers from a bad roof or foundation. Roofs are a little easier to figure out at a first glance in my opinion, because it’s right there and you can usually see the whole thing on your own. Missing shingles, slouching parts of the roof, stains, curling or bubbling, fire and/or smoke damage, light coming through the ceiling, and more are all indicators of a bad roof and should stand out to an investor.

To the untrained eye, foundation damage can be a little harder to spot. I have been trying to learn and develop ways lately to pick up on it during walk throughs myself. What I like to do is start off by standing right in front of the property to look for any signs of damage such as cracks in the patio, floors or walls, slouching patios or sections of the property, missing chunks of the foundation, among others. I am not kidding, I once walked a property with a foundation so bad that a wall in the living room had cracked and the lower half had shifted out leaving a large gap in between the top and bottom halves of the wall. And people had been living that way!

Any rehab investor with a tight budget should be very aware of these two major costs that could come up. Like I said earlier, if you go through the MLS, a good agent will already be very aware of these and should the issue arise, they will most likely recommend you ask for a credit depending on your budget.

2. Asbestos 

According to asbestos.com, most homes built before 1980 contain or once contained asbestos. To those who don’t know, asbestos is a mineral in the form of a fiber which, when destroyed in a rehab, becomes airborne and can caused cancer if inhaled. Back in the day it was a great insulator and was used in old cement, drywall, flooring, and piping (aka most of the building).

With DIY projects to cut costs becoming more and more popular, many people are unknowingly exposing themselves to very harmful minerals. Any DIY investor, especially ones working on old homes, should be very careful if they plan to knock walls down, rip out flooring and more. The areas I like to invest in San Diego are historic districts with some homes built before 1900. This is definitely an issue in my area.

Being that there is such a health risk, finding a ready and able person to remove the asbestos may prove to be difficult depending on where you live. I live in a major metropolitan city, so I have multiple options. But in any case, I truly feel that if you believe you will encounter some sort of asbestos removal during your rehab, confirm that someone near you is able to remove it before you purchase the property. I am lucky to have the options because after I got my latest property, I realized the asbestos issue and none of my rehab team was willing to do it. I could’ve been stuck in a bad spot had I had no other options!

3. Pipes and Gas Lines

It’s just not fair that some of the most expensive projects are the ones we can’t even see! While unfortunate, it is true and we’re just going to have to just deal with it. Pipes are no exception. Any property with bad pipes is going to be a red flag for most buyers, but, again, use this to your advantage. This problem is another one that usually eliminates most of the competition when purchasing the property. I have seen many properties go under contract only to go back on the market due to the pipes. Usually the seller ends up closing for much less than asking.

Unless a seller is aware of the pipe damage that already exists, an inspector, or your tenant, is going to have to confirm the damage for you. My neighbor moved out of the house next to me and rented it out only to find out two months in that she needed to replace both the sewer pipes and gas lines, a project in which the cost can add up to tens of thousands of dollars. Her tenants lived without hot water for months and she was forced to pay their rent for the entire time they stayed. And through this pandemic? What a headache!

And while I feel bad for my neighbor, I can also see how avoidable the whole situation was with the tenants. Had she had an inspection of her home done prior to renting it out she would’ve discovered the problem and corrected it before renting it out. While it would have cost her a good chunk of money up front, long term she could’ve had happy tenants who weren’t begging to leave and take a hot shower.

Discovering problems with the pipes, as mentioned above, can be tough. You would hope that the seller will disclose the last time the pipes were replaced if they even know that information at all. Some things to look out for though in walk throughs that would indicate pipe problems would be mold, or the smell of mold, hearing strange sounds when you run the water, pipe rumbling (a lot of old homes have this) and more. I personally recommend to anyone who buys property (no matter the condition) that they have an inspection done prior to close just to know the complete state of the property before any work is done.

My final bit of advice on pipes in that in San Diego where I am based out of, the city has done pipe replacement initiatives in the past where anyone with pipes of a certain age could have them replaced for free saving you thousands. Definitely something to look into before paying for it yourself!

4. Water Heater

I knew I was growing up when I got really excited when I learned that my primary residence had a newer water heater when I bought it. And for good reason too. As mentioned in the example above, no hot water equals no happy tenants, and maybe even a suddenly vacant property. The good thing is that a new water heater is probably going to be the cheapest replacement on this list. I believe a new water heater is around $500-1,000. Certainly not a new foundation or roof, but it is a significant expense should yours stop working. Plus, when really left untreated, a broken water heater can lead to water damage, leaking, flooding, and worse.

To me, failing to replace the water heater isn’t too much of a hit to the wallet but more to the reputation of your properties and business. There are few things that anger tenants more than not having hot water. It’s almost like not having electricity, you don’t realize just how much you love it until it’s gone. But most importantly, much like my neighbor’s situation, with regular inspection and maintenance, this problem is avoidable. So why choose to deal with it when there are tenants in place?

My handyman told me flushing your tank once a year and checking the pressure valve regularly are the keys to avoiding major water problems down the road. And spotting the potential for a bad water heater is easy. You just have to check the tank! Most of the time there will be a date provided which will tell you when it was installed. A typical water heater will generally last up to 10 years. If the tank in a potential property is over 10 years old, I recommend doing an inspection of the surrounding area and remaining property to look for signs of mold and water damage.

5. Termites and other bugs

Full disclosure: I am really grossed out by bugs inside my house. I know I am not alone, and these pesky little things can really cause problems on a few levels. The first being sanitation. Bugs, much like rats and other pests, carry disease and germs, and they love to live in our stuff. The second is that when left untreated, bugs multiply and multiply and build nests that can be hard to get rid of let alone find. Any sort of infestation of bugs or pests in one of your properties could quickly become a nightmare if left untreated.

When I was living in Hawaii in college my friend’s apartment was infested with cockroaches (anyone who’s spent time on Oahu knows about this!). They are HUGE over there, and they’re everywhere. Any fruit or exposed food left out would be found the next morning covered in 2-inch long roaches. Gross! It became a huge problem in their place mainly due to their bad habit of leaving food out.

So, let this story serve as an example to you in several ways. You can’t depend on your tenants to stay clean and help you in the fight against bugs. In my opinion, the best way to prevent bug issues with tenants is to address them before renting and create a system that will get rid of them and keep them out. A seller should be able to tell you whether or not the area has pest problems. San Diego is known for the many mesas we have which are beautiful to look at and live on, but they house millions and millions of ants and spiders. Infestations are very common.

Something else I have noticed is that construction projects, especially gut rehabs, bring out bugs and can affect the entire neighborhood. I once worked at a restaurant in this mall that underwent major construction. Our building was one of the last to go and regrettably so. By the time all the buildings around us were torn down, their bugs became our bugs and, as a result, we closed earlier than expected.

Finally, most homes are made of wood which always presents the potential for termites. Termite damage is a serious thing and should be address by a termite inspector before the home is purchased. For people looking to do small, more cosmetic rehabs, this one should really be addressed early on as major termite damage will lead to costly and major repairs. The best way to learn of potential bug and pest problems is to communicate with the seller or surrounding neighbors. If a neighbor is dealing with a pest problem, you can assume that your property will face similar issues.

There are many companies that provide bug prevention services. Usually the way it works is you hire a service and pay a monthly fee. They come out to your property and spray either inside, outside, or both typically every other month (although you pay monthly). The costs are usually low (I use a company that is less than $50 per month) and let me tell you, it is worth every penny. You don’t want to deal with tenants that are too grossed out to live in your property.

So, no matter the rehab investor that you are, being aware of the potential for costly fixes will ultimately save you money long term. These are the things that shouldn’t be taken lightly or fixed cheaply. Investors should be thinking long term on these elements of their investment as it will pay off remarkably in the future.