Evaluating the Property

Something that often scares newcomers to real estate investing is how to tell when a property needs too much fixing up to make it a good investment. If the property is in really bad shape, the owner may be motivated to sell way below the market value of a similar property that is in good condition. If you are dealing with an extremely low sale price because the property needs repairs, you have more borrowing power for your repair and rehab loan.

However you must know the difference between cosmetic distress and serious problems. Here are few things to watch for:

Structural Damage.  Outside, look for a dramatic lean in any direction. Inside, look for floors slanted toward a corner of the house. These are indicators for possible foundation problem. Before you reject the project, call several contractors and get free estimates on repairs, then use that information to negotiate a better price.

Termite Damage. Termite damage usually scares off investors, but termites can take up to ten or fifteen years before they do irreparable damage. You can make good deals on termite infested properties. Just figure out the cost of replacing bad wood and exterminating the termites. If you can do that and still make money, buy it.

Roof Damage. Always examine the roof. If it looks as if the roof will need repair in the near future, calculate that into your offer-but wait until the roof starts leaking to replace it.

Major Plumbing. When you are evaluating a property, turn on all the faucets, flush all the toilets, and make sure all the drains run freely.

These are major areas of concern in terms of expenses if problem occurs. In most cases, roofs and plumbing  needs major repairs or replacement only every 20 to 25 years, so problems with them are the exception, not the rule, but it's always better to check. When you find a major problem, don't automatically rule out the property. If you can cover the repairs and still make money, the property is a good investment. If you can't then turn it down.

You might want to hire a professional inspector in the beginning to confirm your opinion, but eventually you'll get to it and can accurately do evaluate it your own.