Home Mortgage Alliance Corporation (HMAC)

All in the perception: seeing stink, a bad roof, mold, and junk as rental investment opportunities

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Published Date 9/22/2020

When you look around for a rental property to buy, what do you look for? A pristine place that is updated and move-in ready? Or do you look for one that may need some TLC so that you have negotiating power to make a great deal?

BiggerPockets' Brandon Turner does the latter and outlines his methodology, saying that he looks for problems first and foremost, apart from the location. When others see work that must be done, he walks into that same property, takes a look around, and starts to get excited. "In fact, it's hard for me to be excited about a property that doesn't have problems!" he says. "It's the fear of dealing with problems that drives most people away, and with less competition, I know I can find better deals."

Turner warns others, however, that problems are accompanied by risk. "It's imperative that you understand the full nature of the problem at hand and that you include an accurate budget to fix that problem when doing your numbers." He suggests using online rental property calculators, and if you are unsure how to properly estimate repair costs, grabbing a copy of J Scott's book, The Book on Estimating Rehab Costs: The Investor's Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs.

One problem he looks for is stink. "When you walk into a house, and it smells like Bigfoot died in the kitchen, is your first thought, 'I gotta get outta here?' The truth is, most people respond with disgust, but seasoned investors see opportunity." Turner says bad smells are one of the easiest problems to fix in a property but one of the things that drive away 99% of the competition. They are generally caused by rotten food, pet urine, and/or smoke residue. He says as long as you are not dealing with some kind of environmental issue or a major sewer leak under the house (get an inspection done!), you'll likely find smells are fairly easy to eliminate with some cleaning.

Turner is not a fan of 2-bedroom properties and prefers to find enough space for a third one. "I'm not talking about some mysterious bedroom hidden behind a wall (though admittedly, that would be pretty cool!). I'm talking about taking a room that is not considered a bedroom and turning it into one." He cites an instance where he found a property that had a storage room next to the laundry. "This storage room was 10 feet by 12 feet—the perfect size for a bedroom. The walls were finished, the floor just needed carpet, and a door needed to be added. In other words, to turn this 2-bedroom home into a 3-bedroom home, I was looking at maybe $3,000 of labor and materials."

While others might turn tail when they see ugly countertops and cabinets, he gets excited. "Most people don't realize how easy it can be to transform an ugly kitchen into a modern, beautiful one with just some new counters and a fresh coat of paint on the cabinets," he says, adding how easy it is to replace countertops with a trip to a big box hardware store and for a few hundred bucks and have them installed in a couple of hours.

Bad roofs don't deter him, either. "I like finding properties that are in desperate need of a new roof, because it scares off a lot of the competition," he says. He goes on to say that while roof replacement is a bigger budget item, it's a worthwhile investment if the property has a lot else going for it. "Now I don't need to worry about the roof leaking on my rental property for many, many years, and I can factor that into my budget."

Believe it or not, Turner loves mold. "Mold is one of best problems I look for when buying a property. You see, mold is a scary thing to the average consumer, maybe even to you, but it shouldn't be. It's a fungus that grows naturally everywhere. It's in your house right now. It's in your car. It's probably in your beard and in your hair. It's in the air you breathe, all the time, if you live in a wet climate. (Still scared?) Mold is everywhere that there is moisture." He says that in small quantities, it's not like anthrax, as much of the U.S. population seems to think, and it's not a random occurrence; it happens for a reason — moisture. So it's simple — eliminate the moisture, and poof! — visible mold is gone. Adding a bathroom vent/fan, addressing a roof leak, or updating the insulation are easy fixes. Basement walls are not so easy, however. "Fixing a bad, leaking foundation can be incredibly complicated and expensive, so unless you are more experienced, I would steer clear of those issues."

Other issues he looks for bad landscaping (easy to tear out and re-plant) and places full or junk. "Hoarding is a real and very common problem for people around the world," he says. "When I see junk, I don't see a problem, I see opportunity. I might be able to get an incredible deal on the property because no one else wants to handle the problem! I can simply hire someone to come clean it out 100%, bringing it to a point where I can put in new carpet, perhaps paint it, and get it rented out for incredible cash flow."

Source: TBWS

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