Before you purchase an investment property, it's wise to have it professionally inspected (just as residential buyers do). The buyer's opportunity to do a property inspection is typically written into the initial purchase agreement as a purchase contingency, and you'll likely ask for around ten days from the agreement signing date to have the inspection completed.
Ideally, especially if this is your first investment property, you want to be present during the actual inspection to have the inspector explain potential issues to you directly. It’s much easier to determine your appetite for risk if you can get a visual of the problem.
But let's assume the home inspector is done. What are you now supposed to do with the multi-page report you receive? Here are some useful things to focus on.
It's in the inspector’s best interest to cover everything that is possibly wrong with the investment property in the report. Inspectors do this to reflect a high level of professionalism, as well as for liability reasons. To avoid being sued, they will commonly document every blemish, nick, and crack (if they’re worth their salt).
Inspection reports are typically about 20 pages long, with two pages of general disclaimers, eight to ten pages of general guidelines, and ten pages specifically evaluating the property from top to bottom (from roof to foundation).
For larger or more complex properties, such as a duplex, the total report may run 30 pages or more.
Inspectors also typically include disclaimer language in their report, such as:
Thus you'll want to pay special attention to the part of the report that relates to your property; but avoid being frightened off by its length and detail.
Keep in mind that in some situations, you may want to arrange additional, more specialized inspections, such as for hazards from floods or earthquakes, or if the general inspection identified problems that require a special analysis (such as mold).
These are some of the highest-risk items to consider before buying an investment property (and before renting it out to tenants):
Electrical. If the wiring is not up to code, you have a potential fire risk on your hands. Never underestimate a tenant’s usage of the service panel. Solid investment opportunities often come in the form of older houses that are selling at a discount because no one has yet invested in modernizing them. Electrical risks are common in older properties and addressing them will reduce the biggest risk to your property: fire.
Structural. Structural issues can lead to headaches down the road and can be the most significant cost item to address. Lot grade issues as well as termite and rot damage to supporting beams and sills can lead to house “sagging,” resulting in uneven floors, shifting door frames, and so on. If undealt with, structural concerns can also be an issue when you go to resell the property later.
Roofing and exterior siding. Any gaps or damage in these areas can lead to interior water leaks resulting in rot and potentially mold. While replacing an entire roof is expensive, if the exposed areas are limited to just a few locations, it could be a relatively minor expense if the rest of the exterior is in good shape.
Furnace. If it has deteriorated, you could be faced with a large capital expense right away. Again, fire and health risks are the two main items you need to concern yourself when renting out an investment property. The inspection report can tell you whether the furnace is a bigger problem than the sellers are making it out to be.
Once you have an inspection report, get estimates from local contractors on what it would take to repair some of the principal problems noted. A good real estate broker will help you through this process and might negotiate a reduction in the sales price to compensate you for the repair costs.
The inspection report should cover an exhaustive list of every defect, but not all of these are issues that need to be fixed in order to provide a safe and comfortable property to rent out.
Cosmetic items in particular, like mismatched exterior paint or bathroom tiles, do not necessarily need to be addressed. Of course, they help make the property more inviting and rentable, which may be key if you are looking in a competitive rental market. But keep in mind that some improvements or cosmetic repairs will not have an impact on your liability for tenant injuries or damages, which will typically be your main concerns.
The Home Disclosures, Inspections and Appraisals section of Nolo's site includes useful articles on getting a home inspection, removing inspection contingencies, and reviewing seller real estate disclosures. (The rules on required disclosures vary by state.)