Ask Marco: Tips for Investing in Older Construction Homes

So, today’s question comes from Blake and Blake is from North Carolina. He asks a question about investing in older construction homes, you know, what recommendations and tips I have, but he has some pretty good and specific questions. So I’m just gonna read his email to me and maybe I’ll break it down into two or three parts because he is got it kind of chunked into different sections. But he basically says, hi Marco. I’m searching for my first investment property and looking into specifically the Indianapolis and Kansas City markets. I noticed that many of the properties in these markets are older construction, some having been built as far back as 1910. The numbers on many of these properties look good, but I cannot help to wonder if they will make good long-term investments.

This may simply reflect my ignorance regarding housing construction, but I worry about several things with these investments. And then he lists four things specifically here. Structural integrity of the house, longevity of the plumbing septic system and electrical wiring, potential unrecognized issues with the foundation of the house and lawsuits related to unaddressed lead paint with homes that were built prior to 1978. These are all legitimate concerns and these are good questions. And it doesn’t just apply to Indianapolis or Kansas City. These actually apply to most every single market, depending on location and or age, because different homes were built with different materials over the different years, and there are different things to consider. And for me, having invested in many different states from as far north as Michigan to as far as south as Florida, I can see the differences in terms of materials used, the type of construction, the foundations that are used.

Some properties don’t have basements, others have basements. And you know, that could lead to foundation issues like cracked foundations. And I’ve had several of those over the years in the Midwest and the North. So let me address these and then he’s got some related questions that go above and beyond that. So first of all, let’s just kind of go down a list of tips, if you will. So when you’re purchasing or looking to purchase and invest in properties, regardless of the location, these are many things that you should consider because investing in residential property can be very lucrative and, and it can be a great wealth preserver and a wealth creator. But every single property comes with its own set of challenges and opportunities. So there are things you need to consider when investing in new homes, but more specifically older construction properties because they’re gonna have potential issues and sometimes they’re not apparent or they’re just hidden.

So the first thing you want to do always as part of your due diligence, is have a thorough inspection. So before you purchase an older property or any property for that matter, but especially older properties, always conduct a comprehensive inspection. You want hire a qualified property inspector and have them do whatever they can as far as a thorough home inspection. Now, keep in mind that most home inspectors are generalists, not specialized in particular areas like the foundation. You know, they don’t have necessarily one area that they specialize in. They’re generalists. So they’re gonna check everything. And usually it’s at a superficial level. Now, I don’t mean that they’re just glossing over things, they’re gonna point things out, but they may not go deep into something. For example, if they have suspicion that there’s asbestos in the property or that the electrical plumbing or HVAC requires attention because it’s older or there’s a leak or there’s some sign or a red flag with it, they’re gonna recommend that you take a closer look with a more qualified specialized inspector.

But these generalists, if you will, these property inspectors that are looking at a property comprehensively. But for the first time, they’re gonna look for any structural issues or outdated systems, like I mentioned, the electrical, plumbing or HVAC, and any signs of wear and tear that might require immediate attention. Then they’ll refer you to a specialist. So you’ll always want a complete comprehensive home inspection or property inspection. And then that leads to potentially other inspections. Now, when it comes to repairs or renovations, you have to budget for that if it’s a property you’re moving forward with. Now keep in mind, if you’re buying a new construction home, this won’t apply. And if you’re buying a newly renovated property, what we often refer to here at Nora Real Estate as a turnkey rental property, you’re not going to have these capital expense issues, but you’re going to have few, if any, maintenance and repair issues, and I shouldn’t even call it that because you’re not gonna have issues.

You’re gonna have things that are gonna show up on an inspection report that are really not significant. When you get an inspection report done. You typically have to look at categorizing what’s on there as must be done, should be done, and could be done. Those are the three classifications I look at. If it’s something on there that should be done, seriously it and evaluate it and use some common sense, if it’s a must be done item, then you don’t have a choice. It’s obviously something that must be done, but that must be done. Item could be something that prevents you from completing the purchase on that property. It may be something that you decide is a deal breaker and you move on, and that’s the whole reason why you want to get a an inspection done. But you’ll typically have almost always a list. Could be a short list, but a, a list of could be done items.

And those are things that you don’t necessarily have to have done because they’re really optional. It’s going to be rare that you ever get an inspection report back that is a clean bill of health, meaning that there’s nothing on that inspection report that says, take a look at this or consider that, or this might be an issue. In other words, there’s never an inspection that comes back that’s a completely clean 100% good to go inspection. It’s, I’ve never seen it and it probably doesn’t exist. So when it comes to renovations, you know, older properties sometimes need renovations or updates that are required to meet modern standards and appeal to tenants or buyers if you’re flipping or reselling it. So you have to budget for these improvements if and when necessary. But again, if it’s new construction or newly renovated, it’s a turnkey property, you’re gonna have little to none of this type of stuff.

It’s also important to understand local regulations if you can familiarize yourself with local building codes and regulations. Now, your home or property inspector will be familiar with this. They’ll be able to help you through and guide you through it when you have a phone call with them if you choose to have a conversation with them. But understand that the older the property, the more regulations might come into play. Older properties may not meet and sometimes actually don’t because they’re just grandfathered in, but they don’t meet current standards, building code standards and whatnot. So you may need to obtain a permit or a qualified, a licensed general contractor to do repairs to meet certain regulations. Is this a common problem? No, it’s not. You know, this is kind of like a worst case scenario thing, but just understand that all markets have local regulations in terms of building code and regulations that need to be met in order for a property to be resold or to be habitable.

Again, these are extreme examples, but keep in mind that there are gonna be regulations and building codes that apply everywhere. Now, you know, we always talk about location, but consider the location of the property carefully. An older property that’s in a desirable neighborhood can have great tenant appeal, it could be a great investment and location often plays a significant role in the property’s value. One thing I like about older homes, and I don’t mean old homes, but older homes, meaning not new construction or they’re 1, 2, 3, maybe even four decades old, is that they’re often in well matured, desirable neighborhoods. So there’s a lot of tenant appeal, there’s a lot of desirability. You’re gonna have a a large tenant pool to draw from and tenants will want to live there. So there’s gonna be strong demand or good demand for it. And that’s something I love because I’ll never have to worry about the property leasing up quickly or getting released to a new tenant when that happens.

So there are some great advantages to preexisting homes, older homes that are in desirable neighborhoods. So keep that in mind because new construction is great, but they’re often in new areas or new developments that are on the outskirts of a city or a town or out there in the path of progress. So there’s not a lot in terms of amenities and sometimes they’re further away and a lot of people don’t want to drive farther to a new home because they may work downtown or far away from wherever that property may be. So there are pros and cons to both new construction and older homes. Now, with existing homes, or which you might wanna call older homes, sometimes they’re in historic or heritage areas. And so they have this status attached to them that they may be a historic site or historic property, which is a cool thing, but if that’s the case, they can come with restrictions on the renovations or changes that can or can’t be made to the property.

So make sure you understand what the limitations are on properties that are in historic or heritage sites before you actually make the investment. Now, when it comes to financial analysis, you always need to do this, but conduct a thorough financial analysis just to make sure that the property that you’re looking at generates positive cash flow. You know, consider the things such as price renovation costs, if there’s any renovations need to be made that you are willing to accept the potential rental income, the resale value, et cetera. Now, this doesn’t come up very often, but sometimes there are environmental concerns. You know, some older properties may have issues with asbestos, lead paint, even mold. So be aware that these potential hazards can exist. You should budget for remedies if necessary, or maybe that’ll be addressed and cured by the seller of the property. Again, if it’s new construction or you’re buying a turnkey rental property like a true turnkey rental property, like what we offer through Nora real estate, you won’t have issues with these things.

Asbestos would’ve been dealt with. Lead paint is probably non-existent. And there certainly wouldn’t be mold when it comes to insurance. You know, just check with your insurance provider to make sure that you have adequate and available coverage for these older properties. Some insurance companies and carriers may charge higher premiums or have special requirements in place when it comes to older homes, and that’s usually with homes that are much older, significantly older, like we’re talking pre 1970s. What else? Long-Term vision, you know, if you have interest in investing in older properties, have a long-term vision because property values may appreciate better in some areas than others, especially over time. There may be a strategic reason for investing in a mature neighborhood or an in an older property. Maybe you have some ideas on renovations or improvements that you wanna make that will increase the value considerably, meaning more than a dollar for dollar, meaning that you put in a dollar, you’re gonna get a dollar 20 back and so you’re getting an instant return on equity.

So there may be strategic reasons to invest in older homes and in mature neighborhoods, and that’s the kind of the longer term vision of things. Now, older homes are may not be energy efficient, so older property can be less energy efficient because they have single pane windows instead of double pane windows. The installation may be older or maybe not as consistent as a new construction home, although arguably there are new construction homes that are not built all that well and they’re not so energy efficient. But they’re supposed to meet a minimum standard. You know, consider investing in upgrades if necessary, although hopefully you don’t have to do this. But, you know, upgrades and installation, energy efficient windows, upgrading or modernizing the HVAC system to reduce utility costs, especially if you’re the one paying for it, not the tenant. You want to appeal to eco conscious tenants and buyers if that’s a market that you’re in.

I know some markets are very sensitive to the environment, if you will, and that’s, you know, a selling feature or a desirable feature to tenants moving in. And last but not least, you know, maintenance, regular maintenance is gonna be obviously a key thing in preserving the value of older properties because there may be other issues that crop up later because of the age. That is not necessarily a bad thing. It’s it’s just what you’re looking for in a property and what your, you know, your plan is for that property long term. If you plan to keep it indefinitely, then obviously you wanna be as thorough in your inspection or inspections as possible. When it comes to structural integrity, I’ve looked at a number of homes, especially in the Midwest that had foundation issues. They happen because the ground moves and over the years you can get cracks in the foundation, which will lead to leaking from the outside in, especially in the rainy season.

And that’s not a good thing because that could lead to problems in the house, could lead potentially to even mold issues. So you wanna make sure that if it’s a, an older home with, with a basement and there’s a foundation, have the foundation thoroughly checked for cracks and make sure that if there’s anything in front of the concrete, meaning that it’s a developed or finished basement, that you have someone who knows what they’re doing in order to make a well-educated inspection. Because if you have a basement that’s completely developed, you can’t easily look behind the walls ’cause you’re gonna have drywall and installation. So these types of inspectors have their own ways of doing evaluations. They can check for moisture, humidity, water damage and whatnot. So there’s always gonna be an element of risk there, but if you do it right and you have the right person looking at it, you can minimize or eliminate the risk.

When it comes to structural integrity, the longevity of plumbing, septic systems and electrical wiring, these are things you wanna look at. The older the property, the more likely you’re gonna have, not necessarily issues, but run into older systems that may have a limited lifespan. Plumbing, obviously you want to have ideally copper. Newer homes and renovations come with pecs, which is a, a type of strong rubbery plastic that replaces copper, but prior to copper you’d have lead pipes and whatnot. So those are ones you don’t want. Copper is good, PEX is even better. Septic systems will need to be flushed. Every so often, it just depends on the size and type of the septic system. But every few years you might have to flush that. That’s a cost on you unless you pass it on to the tenant. Electrical wiring, again, ideally it would be copper.

But there are other forms from years ago. You don’t want knob and tube type of electrical systems. You want electrical panels. So something again, you know, to talk to the inspector about. What else do you have here? Foundation, we talked about that lead paint is not very common anymore for the most part. Most homes have had lead paint removed, but you can always have the inspector have check it thoroughly to see if the lead paint was removed or if you, if it was just painted over, hopefully it was removed and then painted. Blake has a couple of other questions here. He says, what steps should I take beyond the standard home inspection if I choose to invest in older construction home? Are all home inspectors qualified to identify issues, particularly structural with aging homes? Or should I seek someone who specializes in that with my investment inspections?

All right, I’ve already touched on that. You always wanna start with your general home inspector. Do a full inspection as full and complete as they can carefully review the inspection report, ask questions, and then anything that might be an issue or a red flag, bring in another professional. If that’s a property you really like and want, and there are not a lot of issues in the inspection report, then bring in the specialist or specialists to address things like the foundation, like electrical, like HVAC, like you know, paint if you’re concerned about lead paint, et cetera. Blake says, also, could you please speak to the process, the renovation teams you guys work with take to ensure the structural integrity of these homes. Are homes with lead paint undergoing removal of that paint? Or is it simply primed over and repainted the teams that we’ve worked with and continue to work with?

And the property providers we work with that focus on preexisting homes, resale homes, not new construction homes, they will always look at the structural integrity because they don’t wanna be stuck with a property that they know will have an inspection done on it only to find out that there are gonna be problems that will prevent the sale of that property or are additional expenses that they will have to incur in order to cure that issue in order to sell the property, thereby minimizing their profit or profit potential or taking a loss on the property. So odds are the property’s gonna be in very good condition, like new structural integrity will be there. They don’t wanna mess around with lead paint because they have to disclose whether there’s lead paint there or not. And if there is more often than not, they’re gonna have it removed.

They don’t just prime over it. But this is always a good question to ask. You know, ask as part of your due diligence whether there’s lead paint or not, or if there’s any knowledge of lead paint. Again, you know, if you have an inspection done, you can always look into that. So these are all great questions, Blake. I hopefully answered all your questions and provided some good tips in terms of, you know, thoroughly inspecting, budgeting, looking at location regulations, whether there’s historical status, et cetera, et cetera, looking into insurance and whatnot. And Blake just concludes his his great email here with I appreciate very much your constant efforts to educate your listeners and set them up for long-term investing success. I’ve learned a great deal from your podcast. Well, Blake, thank you very, very much. I appreciate you listening and trusting in the show.

And if you have any other questions, be sure to let me know. That is it for today. Remember, subscribe to the show if you haven’t done so already. And if you have a question about real estate or investing or finance or a personal question for me that is off topic not related to investing or finance or even money, go ahead and send that to me. Go to our website passiverealestateinvesting.com. Or of course you could email askmarco@passiverealestateinvesting.com. And just let me know what your question is, share the show with your friends and family, anybody who’s like-minded, visit us on iTunes. Please leave us a rating and review. I love all the five star ratings and I do read all the reviews, so thank you for that. And thank you for listening and I will see you on our next episode.