5 Things to Keep in Mind When Buying a Rental Property “Sight Unseen”

Buying a house “sight unseen” can end up with some surprises – and unseen costs. So, I want to discuss how this has affected us as property managers as well as what owners can do if they are potentially considering buying a rental property “sight unseen.”

For example, we have some owners from places like Canada and California who have purchased properties around Ohio like Dayton and Columbus in this fashion. First, they get hooked up with a realtor to help them with the process of buying an investment property to rent. 

The problem here is this: In many cases, owners don’t understand the market they’ve purchased a home in and also don’t understand what they’ve bought due to the “unseen” nature of the sale. 

• From a maintenance and rehab standpoint, owners often underestimate what it costs to put a vacant property back onto the market as a rental. 

1. Inflation, Labor, and Material Costs

I don’t care how good the pictures look: If a property has been vacant for any number of months at all, it’s going to cost money to put it back in service. As property managers, we want to do everything possible for clients, but construction jobs are out of our purview. 

Consider the following when planning for surprise costs and hidden costs that could arise from buying an investment property that has been vacant “sight unseen”:

• Inflation affects what rent you can charge. Our owners have been able to raise rent due to inflation, but at this point, we’ve pretty much maxed out the rates we can charge for rent. 
• Costs have also increased due to inflation. We used to be able to hire maintenance technicians and other laborers for $16-20 an hour on average. In today’s market, the same labor costs between $20-30 an hour on average. 
• Material costs have also increased in recent history. For owners, including myself, materials have gone up roughly 30% since the COVID-19 pandemic began. In Florida, it’s double where it was in 2022. 

Since it’s not possible to continue to raise the rent on properties, owners have to exercise an abundance of caution when potentially buying a rental property that needs a lot of maintenance or rehab. 

If you want to reduce surprises, I recommend the following:

• Get a property inspection before buying. 
• Negotiate a price that’s suitable for the home’s existing condition. 
• Consult a contractor for bids on projects for clearer estimates of potential costs. 

At ROOST, we like to differentiate between ongoing maintenance and work that needs to be done in occupied units. We have a team of W2 employees to help us do maintenance on properties that are occupied. We give them trucks, we give them vacation time, we pay their taxes, and they’re part of our team. These are the only people who we put into an occupied home to do repairs. And these are minor repairs, such as a clogged sink or some minor electrical work, not the kind of work that needs to be done between tenants. 

For work that needs to be done between tenants, we know it’s going to be more extensive, so we look for 1099 contractors because this is usually cheaper than using our hourly-paid employees to do the larger-scale jobs. Again, we want to solicit bids here and choose the affordable one, but also seems to fit within our timeline and also seems accurate. That’s one of the most cost-effective methods we utilize to tackle maintenance and rehab. 

2. Managing Mortgages and Lines of Credit For Financing

Not only are labor and material costs higher, but most owners end up having mortgages or other lines of credit to finance their purchases. On lines of credit, you may have seen the interest rate double from a year ago. I’ve got some lines of credit that are backed up by properties that have been paid for, and I think it was at 3% interest. But now, in some situations, I’m scrambling to pay off lines of credit that have increased to 8, 9, or even 9 ½ percent interest. If you’ve got a mortgage, you might have had to take out a 30-year term instead of a shorter term. 

Our owners are already dealing with a lot of unexpected costs and inflated costs, which makes the prospect of spending money on maintenance and rehab even more crucial and potentially hazardous to your overall financial well-being and the success of your investment. 

3. Finding the Perfect Property Management Team

Despite the rising costs and inherent stresses of navigating maintenance and rehab in a way that won’t break the budget, it’s important to remember that investing in real estate was a good idea at the time. A few years ago, owners had a way better time buying than what they experience today. In every market where we have properties  – especially in Columbus, Ohio, and parts of Florida – there is still appreciation happening. 

So, I’m here to tell you that you did make a good decision when you bought that property, and I don’t think you paid too much. Cash flow might be getting tighter, and it’s tougher to find deals on materials and labor, but don’t lose hope. Your long-term investment strategy was sound, so when you think about some dangers, I hope you’ll try to remember that you also have a lot of opportunities. Think about what strengths you have right now. 

That’s where the right property management team can help. With the right people at your side, the dangers inherent in real estate investments can be assuaged and controlled, especially if you’re diligent with a budget and realistic about the potential costs. If you have the right property management team installed, they will look after your properties just like they’d look after their own, where their own money is on the line. 

Our team’s core values are simple: 

• Every decision we make on the owner’s behalf is approached with the same mindset we would apply to our investments. 
• We are in a partnership with our owners – and when they succeed, we succeed. 

4. Awareness of Hidden Costs

When you think about hidden costs, several things probably come to mind. For example, in older buildings, you have to consider electrical wiring, plumbing, septic, and other elements like whether the floors are still in good condition, whether the carpet might be old and need to be replaced, whether there is any water or termite damage – and other possibilities that sometimes won’t be apparent until you start making renovations. 

Any method you can use to help mitigate surprises will be to your benefit. As we’ve discussed before, working with the right team, getting bids from contractors about potential projects, paying for home inspections, and trying to avoid buying properties sight unseen can all be beneficial – but having the right mindset and being prepared for the inevitable is the best strategy.

5. What Property Managers Do… And Don’t Do

First, property managers don’t get paid for managing a rehab. We are paid the monthly management fee and the leasing fee. Property managers aren’t qualified to do this kind of work, we’re not paid to do it, and we don’t have time. Rehab jobs must be done by professionals. 

A property manager or property management team does exactly as the name suggests: We manage properties for owners. 

• ROOST is a full-service organization for all your property management needs. Other property management companies don’t focus on sales at all. 

For example, we have some salespeople on staff who are well-versed in investment properties; we like to keep all of our services under one roof. 

Your property managers might not be doing any of the buying or selling work for you – but we can. However, if you are using a realtor outside of your property management company, you should still run your decision by your team before money exchanges hands. 

There are plenty of horror stories in this line of work, but we try to avoid situations where we sign management agreements with owners and we are set up to receive a portion of the rent – a percentage – but it doesn’t work out. We don’t get the rent, it takes us six months to finish a property, and then the owner decides they want to sell. So, they used us to put the property in service, had a bad experience, and nobody is happy. 

That’s why property managers don’t do construction work or tackle that side of things. There’s no reason why a property manager couldn’t give you weekly or biweekly updates on projects as they happen, but that would be done informally and under the guidance of the construction team who are doing the work. 

Final Thoughts

It’s important to consider what to look for when buying an investment property, as issues that pop up with home inspections can lead to costly repairs down the road. Likewise, if you’re looking to buy an older property to rent or for investment purposes, making that purchase “sight unseen” can come with a lot of potential cons. 

Investing in real estate has some risks, but there can also be a lot of rewards if you develop strategies to work with professionals – like a good property management team – who can guide you along the way. 

By keeping on top of the rising costs of materials and labor, potential timeline issues that could impact your overall budget, and trying to avoid hidden costs, you’re on your way to staying on track with your maintenance and rehab budget. It might seem like a lot, but down the road, your diligence will pay off.