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A four-point inspection is a type of property inspection that evaluates the condition and functionality of four critical systems in a home: the roof, electrical system, plumbing system, and HVAC system.
This inspection is typically required by insurance companies for older homes, usually those over 30 years old, before issuing or renewing homeowner’s insurance policies. The primary purpose of a four-point inspection is to assess the risk associated with insuring the property and to ensure that these essential systems are in good working order.
In this article, we’ll cover the importance and relevance of four-point inspections for real estate investors to minimize risk and enhance their decision-making process.
The four components of a four-point inspection are the roof, electrical, plumbing, and HVAC systems. Here are some potential red flags that inspectors will look out for during their examination:
Whoever came up with the term “rainy day fund” likely had a leaky roof in mind.
Inspectors evaluate the roof’s age to estimate its remaining lifespan and check for signs of wear, such as missing or damaged shingles, leaks, and water damage. They also identify the type of roofing material (asphalt, tile, metal, etc.), as different materials have varying lifespans and maintenance needs.
Additionally, inspectors look for potential water damage to the structure and interior. Damaged shingles can lead to leaks, reducing the roof’s effectiveness in protecting the home. Persistent moisture can cause mold and mildew, leading to health issues and further structural damage. A well-maintained roof also enhances the home’s insulation and energy efficiency, potentially lowering heating and electricity costs.
When examining the electrical system, inspectors check the main electrical panel for proper labeling, capacity, and signs of wear. They look for outdated or unsafe wiring types, such as knob-and-tube or aluminum wiring, and ensure the system complies with modern safety standards, including the presence of GFCIs and AFCIs.
Older wiring systems may not handle modern electrical loads and can pose fire hazards. Loose or corroded connections can lead to electrical failures and fires. Older systems might not support the electrical demands of contemporary appliances and devices. So, the inspector can identify necessary upgrades to enhance safety and functionality.
When reviewing the plumbing system, inspectors look at the material, condition, and configuration of pipes, checking for leaks or corrosion. They assess the condition and functionality of fixtures like sinks, toilets, and showers.
Leaking pipes can cause water damage, mold growth, and structural issues. Old, corroded pipes are prone to leaks and bursting. Outdated or malfunctioning fixtures can waste water and reduce the system's efficiency.
Proper plumbing is essential for maintaining hygiene and preventing waterborne illnesses. A well-maintained plumbing system can enhance the home’s value and appeal to potential buyers.
While looking at the HVAC system, inspectors note the age of the system to predict its remaining useful life. They assess the overall condition, looking for signs of wear, rust, or damage.
Leaking ducts can significantly reduce the system’s efficiency and increase energy costs. Older units may be less efficient and more prone to breakdowns. On the other hand, a well-maintained HVAC system can reduce energy bills and increase the home’s appeal. Homes with efficient and functional HVAC systems are more attractive to buyers and tenants.
Property inspections aren’t just crucial for getting to know the property — they’re integral for qualifying for insurance and maximizing your returns.
Insurance companies often require a four-point inspection for older homes before issuing or renewing a policy. The inspection provides detailed information about the home's major systems, ensuring they are in good condition and not at risk of causing significant damage.
The results of the four-point inspection can influence insurance premiums. Homes with well-maintained systems may qualify for lower premiums, while those with outdated or damaged systems may face higher premiums or be denied coverage altogether.
Four-point inspections can also help identify issues with the roof, electrical, plumbing, and HVAC systems that could lead to major problems if left unaddressed. By knowing these risks upfront, investors can take steps to mitigate them, such as making necessary repairs or upgrades.
Early detection of potential problems allows investors to address them before they escalate into more serious and costly issues. This proactive approach helps maintain the property's condition and prevents unexpected expenses.
The detailed report from a four-point inspection can be a powerful tool in negotiations. Investors can leverage the findings to justify requesting a lower purchase price or having the seller make necessary repairs before closing the deal.
Armed with the inspection results, investors can ask sellers to address any issues identified in the report. This can lead to a better deal and ensure the property is in good condition at the time of purchase.
Now, here are three steps to make the most of your investment property’s four-point inspection.
Here are some of the most common questions real estate investors have about four point inspections:
A standard home inspection covers a comprehensive assessment of the entire property, including structural elements, pests, and more.
On the other hand, a four point inspection specifically focuses on four key areas: roof, electrical, plumbing, and HVAC systems. The four point inspection is more targeted and is primarily used for insurance underwriting rather than general property evaluation.
A four point inspection typically takes two to three hours, depending on the size and condition of the property.
The cost of a four point inspection can vary based on location and the property’s size and condition. On average, investors can expect to pay between $300 and $600. Consider obtaining quotes from multiple licensed inspectors to ensure competitive pricing.
After the inspection, the inspector provides a detailed report outlining the condition of the roof, electrical, plumbing, and HVAC systems. This report is submitted to the insurance company, which uses the information to determine coverage terms and premiums. Depending on the findings, homeowners may need to address any issues to secure or maintain insurance coverage.
If the inspection reveals significant issues in any of the four areas, homeowners may need to:
As a real estate investor, you know that identifying issues early can help prevent unexpected expenses and enhance the overall profitability of the investment property.
Another way to potentially increase your returns? By investing through a self-directed IRA (SDIRA).
Unlike most IRAs that only allow investment in stocks, bonds, and mutual funds, SDIRAs enable investors to diversify their retirement portfolios with alternative assets such as real estate, private equity, precious metals, and more.
These accounts operate under all of the same rules as an IRA from a bank or brokerage, and offer all of the same tax advantages. Investing in real estate through an IRA could lead to substantial tax savings.
When an investment property is held in a taxable account, rental income is taxed as ordinary income. This can reach as high as 37% on the federal level and 13.3% on the state level. With an SDIRA, that income could be tax-deferred (traditional SDIRA) or withdrawn entirely tax-free in retirement (Roth SDIRA), potentially leading to much greater take-home earnings.
To learn more about how to invest in real estate with your retirement funds, download our free 5 Steps to Investing in Real Estate Guide.
5 Steps to investing in Real Estate with an SDIRA. Get your free copy now >
Or, if you’re interested in exploring real estate trends set to disrupt the market in 2024 and beyond, watch our recent webinar with Neal Bawa, CEO of Grocapitus and the “Mad Scientist of Multifamily.” In this session, Neal provides data-driven insights to identify up-and-coming markets and help investors avoid common mistakes in their real estate portfolios.