First Rental Property - Needs Roof Replaced

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First Rental Property - Needs Roof Replaced

Kaushik Mahorker
Member since 2021 · 8 posts · 3 votes

Currently in the process of buying my first rental property, a duplex, in Akron, Ohio. Just got the inspection report back today and it looks like the roof is pretty worn and would need to be replaced in the short term (estimated age 20 yrs). There are a few other repairs like a broken window, and cracked joist, but don't seem as expensive as a roof replacement. I feel like I'm already paying a premium rate for the house in the market (around $130k), close to the highest comps in the neighborhood, and don't know if going through with the purchase makes sense.

The property would cashflow about $550 a month (6600 yearly) after all expenses (insurance, taxes, prop manager, mortgage, etc) for a cash on cash of 18%. Basically the first two years is going to the roof and maintenance expenses. The property is already 123 years old. However with some upkeep upfront this could return some really nice cashflow for a while.

What would you do in this situation?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y

I would say that upon inspection , because of the roof, your not going through with the deal...unless, the roof is replaced before closing, by the seller.  Then, if the seller agrees to this, you agree to increase your offer by the cost of the roof...plus 10%.  So, if the roof costs $5k, your offer will increase by $5,500.  On the surface it appears as though the roof will cost you more than if you just replaced it after...and you'd be wrong.

If you replace it after you close, you're paying in cash.  That means it will cost you the full $5,500.  If you do it the way I suggested, it will only cost you around $25/month, or $300/year.  That means a reduced CF by that amount, but nothing out of pocket.  So your tenant will be the one buying the roof for you.

Would you rather pay $5000 in cash, and have to wait until you recover that money from the cash flow before you break even on it, or would you rather have your tenant pay for it and your CF reduced by $25/month, and nothing out of pocket?

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    I would say that upon inspection , because of the roof, your not going through with the deal...unless, the roof is replaced before closing, by the seller.  Then, if the seller agrees to this, you agree to increase your offer by the cost of the roof...plus 10%.  So, if the roof costs $5k, your offer will increase by $5,500.  On the surface it appears as though the roof will cost you more than if you just replaced it after...and you'd be wrong.

    If you replace it after you close, you're paying in cash.  That means it will cost you the full $5,500.  If you do it the way I suggested, it will only cost you around $25/month, or $300/year.  That means a reduced CF by that amount, but nothing out of pocket.  So your tenant will be the one buying the roof for you.

    Would you rather pay $5000 in cash, and have to wait until you recover that money from the cash flow before you break even on it, or would you rather have your tenant pay for it and your CF reduced by $25/month, and nothing out of pocket?

    20Reply
  • Joshua JanusBusiness Member
    Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    Joe is giving some really, really good advice. That is a great way to use other people's money to solve the problem! See if you can wrap other future renovations and upgrades into the loan as a 123yr old property is bound to have issues.

    Is the driveway right up against the siding of the house? Is there a basement? This can increase the chances of future structural and foundational issues. 

    [email protected]614-502-5316Podcast Guest on Show #1
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  • Kaushik Mahorker
    OP
    Member since 2021 · 8 posts · 3 votes
    4y

    @Joe Villeneuve That sounds like a really smart idea! Yeah I think putting 5000 down right now is gonna put me further from my goals of saving up for my second property, which is why I am also reluctant to take it without repairs done. I feel like the buyers won't budge on getting the repairs done/providing credit.

    @Joshua Janus: Yeah i dont know maybe having second thoughts about getting into a really old property as my first. There is no driveway and yes there is a basement. Yeah agreed, there are going to be repairs and I plan to save 10% of profits for future repairs. Could use any advice on this end as well!

    0Reply
  • Kaustubh Johri
    Investor · Atlanta GA · Member since 2018 · 188 posts · 71 votes
    4y

    Agree with Joe. 

    18% COC is really good. I would not pass on this one, although 123 year old building makes me nervous. Make sure you get the structural checked.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Kaushik Mahorker:

    @Joe Villeneuve That sounds like a really smart idea! Yeah I think putting 5000 down right now is gonna put me further from my goals of saving up for my second property, which is why I am also reluctant to take it without repairs done. I feel like the buyers won't budge on getting the repairs done/providing credit.

    @Joshua Janus: Yeah i dont know maybe having second thoughts about getting into a really old property as my first. There is no driveway and yes there is a basement. Yeah agreed, there are going to be repairs and I plan to save 10% of profits for future repairs. Could use any advice on this end as well!

    Your don't want credit anyway...you want them to cover it.

    If you can't get the seller to cover it first, then find a lender that will include that in loan/mortgage.

    Your last option, which I don't like because you're depending on a future appraisal that you have no control over, is to buy it, fix the roof, then 6 months later refi it.  This depends on if that 6 month seasoning period is long enough for the appraiser to actually give you that extra value in the property.  Just because you have to wait 6 months to do a cash out refi, doesn't mean the appraiser has to give you that extra value.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    $550 cash flow is a lot on a $130K property.  You will have one time expenses that are costly owning any home.  You put the inspection in your offer, so talk to the owners and ask for them to pay for replacement.  If they come back offering to cover 50%, I'd still go through with the deal if it was me but if they cover only 50% you get to pick the shingles.

    Joe has a great suggestion.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Kaustubh Johri:

    Agree with Joe. 

    18% COC is really good. I would not pass on this one, although 123 year old building makes me nervous. Make sure you get the structural checked.

    CoC is immaterial. How long will it take to recover his cost (Cash in = DP + cost of roof) if he has to pay for the roof out of pocket? The answer is about 6.5 years...way to long. If the seller fixes the roof before closing, even with the added cost on the mortgage payment to the buyer, the payback of cost (DP only now) is only 4 and a half years. Not great, but much better.

    1Reply
  • Kaushik Mahorker
    OP
    Member since 2021 · 8 posts · 3 votes
    4y

    @Theresa Harris Yeah the returns on the numbers are looking great, which is why this is such a dilemma! I'd definitely have to replace the roof once in the lifetime of the loan, so if it happens now by the sellers that would be ideal. If this was my third or fourth rental, I probably couldve assumed the roof cost more easily as multiple property repairs would offset eachother.

    @Kaustubh Johri Would you suggest getting a separate structural inspector? The current guy I had come in said no concerns structurally. There was some small gap in foundation and cracked joist in the basement, but nothing major to fix. But also, these guys aren't looking inside walls.

    @Joe Villeneuve What would you consider a good DP/cost basis recovery period? I'm probably paying around $35K already including closing costs. But I don't really see DP as an expense, because it goes into the equity of the home. Then again thinking of the market 20 years down the line, I might end up being the last owner of this property, given it would be 150 years old by then, or wouldn't be able to sell close to my current buying price taking a loss in terms of equity.

    Another question, how would y'all go about negotiating this with the seller. This seller was super aggressive even when getting the deal contract done. We gave a strong offer of $128K initially asking for $3K in closing costs and they came back asking for $135K and finally settled on $130K. Should I ask for all repairs mentioned in the inspection report first, and then maybe try to negotiate down for just the roof? Or should I focus solely on driving home that sellers need to replace the roof, and I'll take care of the rest?

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    DP is your ONLY expense.  Just because it goes to equity doesn't mean it isn't a cost to you.  That equity isn't free.  You're buying it...along with the other 80% PV that comes along with it.

    What did you base your bid on?

    0Reply
  • Kaushik Mahorker
    OP
    Member since 2021 · 8 posts · 3 votes
    4y

    @Joe Villeneuve Got it yeah that makes sense, still coming out of pocket. Based the bid on due to the proximity to the University of Akron, strong rental history, similar comps in the area go for 115k-130k, however most would have recent renovations done like a new roof/HVAC. The flooring is updated (nice looking laminate) (2 bedrooms still have carpet, rest is laminate). Already tenant occupied till the end of the year.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Kaushik Mahorker:

    @Joe Villeneuve Got it yeah that makes sense, still coming out of pocket. Based the bid on due to the proximity to the University of Akron, strong rental history, similar comps in the area go for 115k-130k, however most would have recent renovations done like a new roof/HVAC. The flooring is updated (nice looking laminate) (2 bedrooms still have carpet, rest is laminate). Already tenant occupied till the end of the year.

    Not the right answer.  The answer for a rental property should be in dollars per month...as in cash flow, not rent, cash flow.

    0Reply
  • Danielle Jackson
    Phoenix, AZ · Member since 2021 · 504 posts · 282 votes
    4y

    @Kaushik Mahorker if you take Joe's advice, just let the seller know that you aren't closing until the repairs are completed. Make sure they know you aren't expecting them to come out of pocket, but rather willing to increase the purchase price to cover the expense (+10%) of cost. The only issue I've come up against when using this strategy, is some sellers don't want to be responsible for the work prior to closing. 

    Remember, the worst they can say is no. Then you will have to re-evaluate your path forward. 

    1Reply
  • Neil Furry
    Contractor · Zionsville, IN · Member since 2022 · 14 posts · 2 votes
    4y

    Have the current homeowner try and file a wind/hail claim before the sale goes through.  If you can find/know an experienced contractor, they should be able to navigate the insurance process with you.  I do this all the time with homeowners as well as real estate agents here in the Indianapolis market.  The buyer will want to get the roof replaced, the homeowner doesn't want to foot the bill.. ok, well we step in and get the roof purchased with insurance money.  Just make sure the sale agreement states that the current homeowner has to see through the claim as well as the installation of the new roof.  Definitely find a contractor that specializes in insurance work. There is an art to working with insurance companies that takes a few years to master, especially when dealing with a home for sale.  If you have any questions, I am very experienced in this field. 

    0Reply
  • Kaushik Mahorker
    OP
    Member since 2021 · 8 posts · 3 votes
    4y

    @Danielle Jackson @Joe Villeneuve They just got back that they're willing to pay for $4000 as credit in escrow, claiming that Ohio roofing is about $8000. My agent says this is a good deal - do I counter this? It looks like they don't want to make repairs before closing and its snowing/ice on the roof right now so roof repair would delay closing. There are also other repairs - not as concerning, but I expect those to be another few thousand with labor. My gut tells me to get a professional estimate of all the repairs and ask them to pay at least half of that as well or credit the whole roof. Thoughts?

    @Neil Furry I'm under the impression that most insurance companies don't cover roof repair due to wear and tear.

    0Reply
  • Neil Furry
    Contractor · Zionsville, IN · Member since 2022 · 14 posts · 2 votes
    4y

    You are correct that most if not every insurance company will not purchase just due to wear and tear.  The idea is that A) if its on someone else's insurance history then it never hurts to offer the situation to save everyone money, and B) a good contractor can leverage a wear spot to be hail, or find old hail spots on the roof that can be attributed to a recent storm (within the last 2 years, in some cases 1 year).  This is a very common strategy with many contractors working in areas that get small hail, we run a zip code that we want to focus on to get all the recent storms that we can attribute any damage to within the last year or two.  

    Something to keep in mind, probably a lot of useless information but I always like to help homeowners save money and even help the sale process move more smoothly due to everyone saving money.  Homeowner saves cost of the roof, and the new purchaser gets a new roof and immediate increase in value! 

    0Reply
  • Tanner Sherman
    Real Estate Broker · Omaha, NE · Member since 2020 · 329 posts · 203 votes
    4y

    I really like Joe's idea. I was going to say to deduct it from the purchase price or ask the seller for concessions, but padding it into the purchase price of the house is definitely a smart way to go so long as the comps will support the raised purchase price. 

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Kaushik Mahorker:

    @Danielle Jackson @Joe Villeneuve They just got back that they're willing to pay for $4000 as credit in escrow, claiming that Ohio roofing is about $8000. My agent says this is a good deal - do I counter this? It looks like they don't want to make repairs before closing and its snowing/ice on the roof right now so roof repair would delay closing. There are also other repairs - not as concerning, but I expect those to be another few thousand with labor. My gut tells me to get a professional estimate of all the repairs and ask them to pay at least half of that as well or credit the whole roof. Thoughts?

    @Neil Furry I'm under the impression that most insurance companies don't cover roof repair due to wear and tear.

     Let me get this straight:

    1 -  They have established the fact they are willing to cover the roof by putting money in escrow, but not willing to replace the roof.

    2 - It's snowing.

    If it's me, I'm not budging.  I'm not willing to close unless the roof is repaired.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y
    Originally posted by @Kaushik Mahorker:

    @Danielle Jackson @Joe Villeneuve They just got back that they're willing to pay for $4000 as credit in escrow, claiming that Ohio roofing is about $8000. My agent says this is a good deal - do I counter this? It looks like they don't want to make repairs before closing and its snowing/ice on the roof right now so roof repair would delay closing. There are also other repairs - not as concerning, but I expect those to be another few thousand with labor. My gut tells me to get a professional estimate of all the repairs and ask them to pay at least half of that as well or credit the whole roof. Thoughts?

    @Neil Furry I'm under the impression that most insurance companies don't cover roof repair due to wear and tear.

     Get an estimate of the cost to replace the roofing.

    1Reply
  • Michael Lewicki
    Specialist · New York, NY · Member since 2021 · 24 posts · 9 votes
    4y

    @Joshua Janus

    Wouldn’t it be better to just take some money off or pay closing costs? I had a seller “fix” an issue and they used the cheapest company and I ended up having to do it twice.

    1Reply
  • Joshua JanusBusiness Member
    Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    Well I am implying that it actually gets fixed. If the seller is lazy and unreliable to solve the issues, it would then be on you. 

    [email protected]614-502-5316Podcast Guest on Show #1
    0Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    4y

    @Kaushik Mahorker If you can swing the cost of the roof I'd do the deal still. Most of my buildings are at least 80-100 years old. You'll get back some of the roof off in taxes. And you got half from the sellers. Plus you can get several bids on the work. 18%CoC is tremendous! I'd love to see that on my deals.

    I'm looking at 18% for the first time on my 7th property which is almost a total rehab, and therefore price reduced accordingly and has to be a cash buy because of it. Of course I'll refinance it down the road if I'm even the one that manages to land the contract on it! Normally in my market I'm averaging about 8% CoC.

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    4y

    Propose what @Joe Villeneuve said at the beginning of this thread before trying to come up with another solution, this is the easiest for everyone involved. 

    1Reply
  • Jared Lichtin
    Contractor · Cleveland, OH · Member since 2014 · 317 posts · 181 votes
    4y

    @Kaushik Mahorker hey man I’m an investor in Cleveland and I’ve done a bunch of flips down in Akron. I’d be happy to link up next week and take a look at the roof with you.

    0Reply
  • Michael J.
    Real Estate Agent · Greenville, SC · Member since 2021 · 210 posts · 142 votes
    4y
    Originally posted by @Neil Furry:

    Have the current homeowner try and file a wind/hail claim before the sale goes through.  If you can find/know an experienced contractor, they should be able to navigate the insurance process with you.  I do this all the time with homeowners as well as real estate agents here in the Indianapolis market.  The buyer will want to get the roof replaced, the homeowner doesn't want to foot the bill.. ok, well we step in and get the roof purchased with insurance money.  Just make sure the sale agreement states that the current homeowner has to see through the claim as well as the installation of the new roof.  Definitely find a contractor that specializes in insurance work. There is an art to working with insurance companies that takes a few years to master, especially when dealing with a home for sale.  If you have any questions, I am very experienced in this field. 

    I was coming here to say this.  I try to get all the sellers I deal with to file a claim with insurance on the roof to see if we can get it replaced before purchasing.  I will then add the deductible to my offer price.  So if they pay $1000 deductible, then I increase my offer by $1000.

    0Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    I do one brrr after another and have my own crew of guys to do the work.  Doing that roof would cost me under $3000, so no big deal.

    1Reply
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