In our last instalment I revealed the process by which my friend James (now a fab fellow associate here at urbaneer.com Bosley) and I searched, identified and purchased the right income property for us in idyllic Charlottetown. Click HERE to read the last post.
In this post, James and I want to share our recommendations on what to do when you first take ownership of an income property.
Namely, create an' Income Property To Do' List.
The moment we closed the deal on our $153,000 purchase our objectives were to ensure that all the building components and systems were functioning safely, that the property was properly insured based on its condition, and to begin cleaning up the property. Using our home inspection report as our guide (Note - a home inspection report serves as an asset both in executing your due diligence prior to firming up your purchase and as a 'Repair, Upgrade and Renovation Road Map' thereafter), we categorized and prioritized both the niggly piggly deficiencies and more substantial building component problems in a systematic fashion. By compiling all this information, we developed a comprehensive outline of the work required which we could subsequently rank in order of importance, expense and how it fit in our overall long term renovation objective.
Furthermore, to demonstrate our commitment to being good landlords we also asked the tenants to provide us with a list of their deficiencies for us to fix, both as a gesture of good will and in an effort to preserve their tenancy. As it would turn out, the first floor resident gave notice during our negotiations and vacated at closing. We hope it wasn't something we said!
Given our immediate objective was to maintain the income stream, we promptly had our contractor embark on a modest repaint, clean up and cosmetic bathroom makeover of the now vacant first floor suite. Fortunately for us, the modest $583 investment saw the rent increase from $600 per month inclusive to $750 per month. Not bad! Along with the improved income, addressing and overcoming this hurdle reinforced our belief that we had the potential to make this a successful investment. As for our other tenants, the darling second floor resident Peter was keen to see us refresh his kitchen with fresh paint and appliances, and our third floor tenant, who was related to the previous owner, seemed content with the status quo. We were ok with this, given the third floor suite was pegged as our first cosmetic project for Summer 2009, nine months after we took ownership.
During the first winter of ownership we summarized the entire scope of work, our estimated cost to repair or replace the failing building components, and the amount of time it would realistically require to be executed (taking into account our access to capital, the availability of trades, and the weather conditions which, in Canada, impacts when the work can be undertaken). We also wanted to remedy all the little problems before they unravelled into big problems if untended, while ensuring we were not being short-sighted making repairs to building components that we'd ultimately be renovating or replacing sooner than later. For example, in our case, knowing we wanted to add skylights and a steel roof to our triplex, we had the existing roof patched as simply and inexpensively as possible to try extend its life space another year or two while we obtained quotes from competent roofing trades.
Our review identified the following issues and approximate costs:
- Water penetration - Although this house has a full-height poured-concrete basement which is unusual for Charlottetown (many houses have Island stone foundations that leak like a sieve), ours still leaked due to the fact portions abutted pre-existing island stone in two areas. The ground around the house was poorly graded so water was pooling around the foundation on most sides, the basement windows were rotted, and the eavestroughs and downspouts were shot. A lot of water was surrounding the house instead of being diverted away. Estimated Repair Expense: $4500
- Exterior - The side porch and staircase to the rear entry serving the third floor, the enclosed front porch, the third floor deck and fire escape, plus the garage were all in poor condition. The exterior shingles on the house needed new paint. Estimated Cost To Remove, Rebuild and Repair As Required: $15,000
- Roofing/Flashing/Chimney - Immediate Replacement or temporary patching until replaced. The chimney needed to be rebuilt. Cost For New Steel Roof & Chimney With Liner: $12,500
- Wiring - The three wiring panels for each suite were in satisfactory condition but according to the home inspection report required some minor repairs. Actual Work Required Was More Substantial: $3400
- Heating - Hot Water Radiators and Boiler - This boiler was in decent condition. The old radiators had a lot of peeling paint and they were difficult to bleed. Cost To Recondition: $1000
- Plumbing - Overall in decent condition with minor repairs including getting the sump pump working. Cost: $400
- Insulation - The exterior shingle frame house had no insulation in the walls. The ceiling had a R28 value which wasn't ideal given the cold winters. Cost To Blow-In Insulation In Walls & Attic: $2500
- Windows - All in poor condition. Cost to Replace & Install: $15,000
- Cosmetics - The kitchens, baths, walls and floors, were all functioning and serviceable, though aesthetically challenging if not downright visually assaulting. Cost: The Sky's The Limit
Estimated Total Tune-Up Expense (Excluding Cosmetics): $54,300
If you're considering the purchase of an investment property, we recommend you follow this outline:
1) ensure it is structurally sound
2) buy only where you can solve any water management issues (ie: your leaking basement) without significant expense
3) of the five major building components (roof, heating/cooling, wiring, plumbing, and windows), try ensure a minimum of three are in reasonable condition unless you are committed to rebuilding.
4) make sure the exterior skin of the building has longevity without big bucks. We avoided houses covered in siding as they can often mask more serious issues underneath, and likewise properties where asbestos cladding or insulation was present, as removal can be expensive and complicated.
Here's one of urbaneer's HomeWatch newsletters called The Value In Buildings that addresses this in more detail.
If you're curious to see what Cosmetic Improvements we embarked on, and how it translated in an increased income stream, stay tuned for more Tales Of Upper Hillsborough!