Properties are rented every day that are suitable for some tenants but would be considered unrentable for others. From an investor standpoint, you may have your own definition of what’s rentable and will spend according to your standards. But strictly speaking, unrentable properties are ones that are uninhabitable and make the property uninsurable. Here’s what you need to do to make sure the property is suitable for renting out to tenants--whether residential or commercial.
Step 1 – The Property Inspection
The inspection, typically completed during the purchase process, will inform you of the most significant issues regarding your investment property. The more thorough the inspection, the better, so you're aware of all potential problems with the property.
The home inspector usually delineates which issues are major concerns by either writing special notes up on the items, or color coding their comments based on the level of urgency with which they need to be attended to. Following is a general breakdown of the items that will be reported. Make sure, if nothing else, you address the safety issues the inspector identifies. And keep in mind that when it comes to residential property, state laws require landlords to provide habitable rental premises--for example, by maintaining electrical, plumbing, and heating facilities. So, before you purchase, be sure you check out state and local housing codes which affect the property.
Critical – Safety Repair Items
No getting around it, these are items you definitely want to repair before renting out your investment property. Some examples include:
- missing joist hangers on decks and porches
- faulty wiring, missing GFCIs (ground fault circuit interrupters), and reverse polarity for electrical components, and
- leaks in piping leading to and/or from the furnace.
Potential Major Cost Items
This is a judgment call. A big expense now could save you money down the road. Potential high-cost items include:
- structural issues such as rotted sills or beams
- poor insulation and ventilation that can lead to mold problems, and
- termite infestations.
These are non-critical items that would improve the experience of renting your property, such as:
- trim work needing repairs
- appliance issues
- mold removal, non-toxic, and
- dry-wall patching.
Missing Items in New Construction
If the property is newer, there should be standard items you’d expect to have as part of the construction. Knowing what’s been missed can help you get the items repaired at no cost to you. Usually this includes items not done to code, such as missing electrical outlets or defective plumbing.
More Information on Inspections
For more details on inspection reports, see the Nolo article Evaluating Inspection Reports on Investment Properties.
Step 2 – Insurance Appraisal
Before you close on the purchase of your investment property, you need to line up a landlord’s insurance policy to ensure you are protected before renting it. A good insurance plan should cover damage to the property caused by fire, storms, burglary, and other hazards, plus include liability coverage for injuries or losses to others resulting from defective conditions on the property.
When the appraiser comes out for the insurance company they may identify some issues that will need to be corrected before they will insure the property. These include missing stair rails, broken steps, or structural items that the insurance appraiser has reason to suspect could fall at some point, such as a deteriorated fence, and pose a danger to a renter. These items are commonly identified because they are not necessarily essential items for a home owner to be concerned with, but when the property is converted to an investment property, insurance companies treat them as an injury risk. And, as mentioned earlier, if you are renting out residential property, you will be legally required to provide habitable premises. If the investment property is commercial, the latest ADA standards for accessible design for individuals with disabilities need to be addressed as well.
Step 3 – Negotiating a Lease
Once you own the property and are ready to rent it out, depending on the condition and type of property, you may have to do some improvements according to the renter’s wishes and state and local housing codes.
If it’s commercial space, new tenants will often look for some kind of credit as they are planning on investing money into the property themselves to help promote their business. A typical concession on the landlord’s part is to provide the tenant with what’s known as a Tenant Improvement Allowance, or TI Allowance, to make the improvements they wish. The TI Allowance could equal a couple months of rent or some percentage of the overall rent depending on the terms of your lease. But the improvements themselves will likely be paid for and managed by the tenant, albeit with the landlord’s approval before work begins.
If the investment property is residential, there may be an old appliance or permanently stained carpet that is in really bad shape. A prospective tenant may wish to rent your property, but only if you address these problems. While you might not want to spend your money on new carpet, it may well be worth the investment. If you don't replace the carpet, for example, chances are you will continue to have a vacant property as other potential renters will have the same issue, and you will suffer an annual net loss. While the initial costs may be high, investing in improvements now will help get cash flowing back to you more quickly. And, of course, you may have a legal responsibility to make some improvements if the rental does not now comply with state and local housing laws.
Step 4 – Lease Management
During the course of a tenant’s lease, problems will likely arise. Some items may be the tenant’s fault, such as a broken window, while others may be nobody’s fault, such as carpenter ants invading the kitchen. State and local laws will delineate landlord and tenant maintenance and repair responsibilities and you need to understand those before making a decision on what you will and won’t pay for. To avoid confusion with tenants, many landlords spell out maintenance and repair responsibilities in their lease or rental agreement.
Some tenants will ask for everything under the sun, which is not sustainable for the property to remain in the black, but picking up some costs on behalf of your tenant can help extend lease longevity, which is a good thing if it’s a tenant you wish to keep. It costs you money to find a new tenant, and sometimes paying for small improvements over time can help you avoid turnover. Replacing the bathroom vanity may be a big cost, for example, but it’s typically less than the cost of a missed month of rent. The same principal applies to a commercial storefront needing updating, or commercial signage. Pick your spots and improve your property when your budget allows and when there is a reward in doing so for either your tenant relationship, or for your investment.