Considerations for Buying an Investment Property

Reality TV shows make it look easy: Buy a fixer-upper home, renovate it, sell it, and make a big profit. But that’s not how it typically works. In fact, at least one person featured in an episode of HGTV’s show “Fixer Upper” said he had already bought his home before appearing on the show and that the show stages the home-shopping process.

“Flipping” a house to make a profit is a risky move, for many reasons. First, the biggest mistake people make is underestimating the scope and cost to renovate a home. Complications often arise during renovation, and dealing with those surprises can significantly increase costs. Plus, the people doing the work – carpenters, plumbers, and other craftspeople – can provide estimates for jobs, but the actual costs could end up being much higher. Selling a property can also take longer than anticipated and there are significant carrying costs for the home, that need to be budgeted. Lastly, there are tax consequences for flipping a house, especially short term capital gains.

If you’re planning to buy a home to renovate, you’ll likely get a better return on your investment by hanging onto that property and leasing it, rather than selling it. When you lease a home, you receive monthly rent, in perpetuity, whereas selling it might reward you very little for all the time and money you invested in renovation. Being a landlord isn’t without risk, but it may entail less risk than trying to flip a house.

Renovation Costs

Justin Pierce, a real estate investor in northern Virginia, said it’s important to get bids from several contractors when doing any renovation because the costs can vary considerably from one contractor to the next. He said the cost of renovating a small bathroom could be $3,500 to $5,000, and that doesn’t include dumping fees or the cost of hauling materials to a dumpsite. And he said he’s never done a renovation that was less than $35,000.

Handling Repairs

Even in a recently renovated home, things can go wrong, and if a tree falls on the roof or the furnace dies in the middle of winter, landlords are obligated to remedy those problems as soon as possible.

Real estate investor Leonard Baron says landlords should have money set aside for unexpected repairs and should be able to handle some maintenance tasks on their own. If landlords don’t repair major defects promptly, Maryland tenants may ask the court to set up a rent escrow account, which means the court collects rent, and the landlord cannot access that money until repairs are complete.

Finding Tenants

Many landlords already have full-time jobs, so they don’t have much free time to show a property to prospective tenants or to screen tenant applications. But there are plenty of companies that can handle those tasks for landlords.

At a minimum, a tenant screening should include a credit check, employment verification, review of employment history (to ensure the tenant has been steadily employed), and a reference from a previous landlord. Landlords may ask for more information than that, but they must be cautious about asking any question that could be construed as unlawfully discriminatory – for example, landlords cannot ask about someone’s race or religion.

Planning for Worst-Case Scenarios

Occasionally, landlords may have tenants who stop paying the rent or who cause considerable damage to the property. If you’re thinking of becoming a landlord, make sure you have the funds to cover the deductible on the home’s insurance. And if you have a mortgage on the rental home, be prepared to make the mortgage payment for a few months, just in case the home is vacant due to eviction or while you make repairs.

Lusk Law, LLC, specializes in assisting landlords, helping to avoid litigation when possible, and we’re ready to actively represent our clients in court when litigation is necessary. Our experienced attorneys have provided legal counsel and representation to landlords in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland. Whether you’re a new or veteran landlord, we welcome any questions you may have. Please call us at 443-535-9715 or fill out our contact form if you need legal advice.

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