Taking a gander.
August 15, 2010 4:44 AM   Subscribe

What do you look for on a preliminary walk-through of a potential income-producing real estate investment? Which features are definite positives? Which features are red flags?

I'm about to accompany a listing broker on a viewing of several income-producing apartments--mostly small, two-story brick buildings and wood-frame fourplexes.

I'm aware of the pitfalls of investing in our current, unstable real estate market, and the shady foreclosure deals that tempt some investors (of which I'm not one). The preliminary viewing in question is a quick, 30-minute walk-through of each property, prior to a thorough structural and extensive due diligence with my advisors and attorney (assuming I find a property I like).

Chiefly, I'm interested in any visual signs or clues regarding the income-producing potential of the properties. Are they in desirable neighborhoods? Is the current tenant pool solid, with satisfied tenants who pay their rent regularly and look at the building as long-term housing? Are vacancies filled quickly?

Also, as a preliminary to a full structural, what red flags should I look for that might point to expensive repairs down the road?

Again, I realize that the amount of visual information I can take in is limited. My preliminary inspection will in no way take the place of a full structural or comprehensive due diligence. But I want to make the most of it, using my eyes and ears to the fullest extent. What clues might I look for?
posted by Gordion Knott to Work & Money (6 answers total) 6 users marked this as a favorite
- How old are the structural works? If they're relatively new, chances are they won't fail early on. Older infrastructure may pose problems in the near future (esp the electrical system and air conditioning), though this may not always be the case

- Have the tenants lived there for a long time? If they have, chances are they're pretty homeproud (even though it's technically not owned by them), and are more likely to take good care of the house

- Is the plumbing ok? No corroded pipes, leaky pipes, pipes from last century etc. They can be a hassle to repair/replace.
posted by titantoppler at 5:05 AM on August 15, 2010

Aluminum wiring is still out there. Oddly enough there are a lot of real estate 'professionals' that do not know what that means.
posted by buzzman at 5:51 AM on August 15, 2010

YES my relative just bought a house with aluminum wiring. Fortunately the inspector caught it and the previous owner paid to have all the wiring re-done.

I was all proud because the one thing I'd given as advice to him and his wife was "Watch out for aluminum wiring."
posted by XMLicious at 5:59 AM on August 15, 2010 [2 favorites]

One thing I would be looking at, alongside of the structural issues and mechanics of the building itself, is the neighborhood. Is it close to things that tenants find desirable? Is it noisy or quiet? Are the other buildings/units on the block owned or rented? The quality of the local school? Public transportation? Crime issues?
posted by jeanmari at 6:26 AM on August 15, 2010

This is what I'd tell someone looking for commercial premises:
Look at nearby vacancies. Are there many of them? How long have they been vacant for? Have high-value tenancies been replaced by low value ones? That is, have department stores been replaced by mixed-tenancy malls, or traditional merchants been replaced by discount and "dollar" stores? Do existing tenants seem to be on month-by-month rentals rather than fixed leases? All these things indicate soft demand in your area, which will make it harder for you to rent the premises and achieve a good rent.

If you transfer the lesson to residential premises you can see that you have the same concerns - you want long-term tenants who will pay high levels of rent, and you want to be able to fill vacancies easily. So watch out for areas with too many vacancies, and ones where the tenants seem to be on short leases. Is the area going downhill or moving upmarket? Are nearby tenants elderly? The area might be headed for a rapid decline as vacancies aren't filled. Are they college students? Expect higher levels of turnover. Families? They tend to stable tenants, even though kids can be rough on a place.
posted by Joe in Australia at 6:40 AM on August 15, 2010

Also, look to see how new the windows are. If they've been recently replaced, it can be a good sign

However, if the windows are vinyl? This is could be a terrible sign.
posted by jeanmari at 7:52 PM on August 20, 2010

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