Did My Tenants Ruin This Property? First Walkthrough After a Sight-Unseen Buy

TLDR
I bought this duplex sight unseen in a growth neighborhood. My property management team told me I might be screwed. On the walkthrough I found the opposite, two units that need paint, floors, and safety work for about $40,000 total.

Table of Contents

Why I Buy In Growth Neighborhoods

You can buy houses in a nicer neighborhood. The deal is safer, the tenant is usually a higher class, less headache. That is the strategy for a lot of people.

Growth neighborhoods are different. Cap rates are better. Cap rate just means rent versus what you actually paid for the house. The cash flow is generally better. And the equity has a higher ceiling because the area is moving up. You go up, up, up, level off, then keep climbing. A nicer neighborhood moves slower and more steady.

I am a full-time investor. I kind of bought the job of having headaches. So I buy in growth neighborhoods on purpose.

The lower the price, the higher the cap rate, the more the headaches. Pick your tradeoffs on the front end.

Unit One: Better Than I Expected

I walk in and it smells like a rent house. Not a new house. A rent house. That should tell you how the day is going to go.

A little mold on the quarter round. Topical. It comes off with the quarter round when we pull it to do new floors. Electric heat is working. Floors are solid, which is a great sign. If the floors are solid I am not tearing into subfloor. The burners on the stove work. The cabinets are fine. I will just paint them and put new handles on.

There are exposed fixtures without covers. You cannot rent a house to a family with light fixtures that have exposed bulbs where a kid can reach them. That is one of the safety and liability items that is not negotiable.

The scope for this side is pretty tight:

  • New flooring throughout
  • Paint everything
  • New light fixtures with covers
  • plumbing caulk and seal so water does not get where it should not
  • Paint the kitchen cabinets
  • Replace a stove burner

I am calling this one a $10,000 to $15,000 turnover.

Unit Two: The Worse Side

Different smell on the other side. Cigarette smoke, mildew, rat poop, general musk. It is worse.

There is a potential leak in the roof. Staining on the ceiling. The roof on this building is newer so I think we find the leak and patch it instead of replacing it. A new roof does not make me more rent. I only replace a roof when I cannot patch it, or when a patch is failing fast. Everything gets filtered through two questions: is it a safety and liability issue, and is it going to make me more rent or prevent damage?

The base cabinets are eaten up. The countertops are crappy. I was going to just paint them like the other side, but I think it is cheaper to put in new base cabinets and countertops. I will reuse the sink. Take the uppers down and put new ones in. I might do the same thing on the other side now that I think about it.

The electrical is not to code. Gaps everywhere where water is getting in. We caulk all of it.

So this side is floors, paint, new base cabinets, new uppers, new countertops, new electrical work on the bad spots, stove, fridge. Probably double the cost of the first side.

Dumb Mistake
Chasing one fix at a time. When you find out the cabinets need to come out, rethink the whole kitchen in one pass. Doing cabinets today and countertops next month means two visits from the carpenter and two from the plumber. Bundle the scope.

The Slum Lord Line

A lot of people say anybody with a rental in a growth neighborhood is a slum lord. I think that is lazy.

The line is simple. You are a slum lord if you ignore safety and liability items. Exposed electrical a kid can touch. Broken glass. Windows that will not open in a bedroom so a fireman cannot get in. Fire alarms that chirp because the battery is dead and you never replace them.

You are not a slum lord if you provide livable, affordable housing and you handle the safety items every time. The finishes do not have to be great. The finishes have to match the scale of livability that the neighborhood pays for. If I put $40,000 of finishes into a $1,300-per-month unit, I do not get higher rent. I just spent $20,000 more on a house that will get beat up the same way.

Finishes are a floor, not a ceiling. Hit the floor. Do not keep climbing.

Outside: Roof, Gutters, Crawlspace

Exterior is the part most people skim. It is where a property gets quietly destroyed over years.

  • Gutters. No gutters on a rental is asking for water problems. Water runs down the fascia, eats the trim, gets under the siding. I add gutters and downspouts that throw water at least six feet from the foundation.
  • Fascia paint. Raw fascia rots. Painted fascia lasts.
  • crawl space door. Broken door means animals get in. I replace it and add a block or a latch.
  • Window unit holes. If there is a hole where a window unit used to sit, fill it. Otherwise we are heating the outside.
  • Storm doors and railings. Broken spindles where a kid can fall through are safety items, not cosmetic.

The crawl space on this property was Blair Witch. Not a joke. I need to patch a hole under the house that a punch from the crawl side lands you inside the drywall of a bedroom. That is a rodent highway and a liability.

Pro Tip
On rentals, always look at what is actively bleeding. Live leaks, live water entry, live rot. You fix what is actively causing damage first, then you worry about cosmetic.

The Numbers

Each side rents for $1,200 to $1,300 a month. Two units. Combined rent around $2,600 a month. Using the 1 percent rule as a rough sanity check, that is roughly a $260,000 value ceiling for this kind of property in this area.

I bought it for around $130,000. If I put $10,000 to $15,000 into side one and a bigger number into side two, plus exterior work, I am around $40,000 total in renovation. All in around $170,000 on a property worth around $260,000.

That is the gap I am looking for on a rental. Enough equity on the front end that a market dip does not wipe me out, enough cash flow that the tenants are paying down the mortgage, and a neighborhood that is on the way up instead of on the way down.

Sight unseen buys work when the discount on the front end covers the bad surprises on the back end.

FAQ

Should I buy rentals sight unseen?

Only if the price reflects sight-unseen risk. I expected sloping floors, a $5,000 cleanout, leaks, and mold. The price reflected that. When your discount is big enough to eat the worst case, sight unseen is workable. When you are paying market price on faith, you are gambling.

How do I know a growth neighborhood from a bad neighborhood?

Look for permits pulled, other flippers working, new construction, infrastructure money. A bad neighborhood looks the same next year. A growth neighborhood has fresh activity. Drive it on a weekday morning and a Friday night and see what changes.

What’s the first thing you check on a turnover walkthrough?

The floors. Solid floors mean the subfloor is fine and the joists are probably fine. Soft or sloping floors mean structural. Structural changes the whole budget.

Can I skip gutters on a rental?

No. Gutters are cheap. Water damage is not. Missing gutters quietly rot fascia and siding and push water into the foundation for years until you are looking at ten grand of exterior work that started as a $700 gutter job.

Is painting cabinets as good as replacing them?

If the cabinet boxes are solid, paint is half the cost and reads almost the same to a tenant. If the boxes are eaten up or the layout is wrong, replace. This unit had one of each and I ran both plays, side by side.