I am a new real estate investor on the west coast, looking to purchase a property in the Midwest. I have a spreadsheet for my analysis of the rates of return, including cash on cash and IRR, with all revenue and expense inputs. My dilemma is this---If I include major capex reserves such as for roof and all new HVAC, assuming replacement in 20 to 30 years, the rates of return go down to the point where I am not really excited about most of the deals out there. However, if I assume a 10 year holding period only and not account for these items, obviously assuming I buy a newly renovated property, the returns look better. But, I was hoping to be able to retire in 20 years with cash flow real estate! Maybe in 10 years just buy another renovated property or 1031 into multifamily? Does anyone have a good strategy for long term SFR rentals they could share? Thank you group!
I wouldn't advise taking shortcuts or trying to force a deal. If the numbers don't work, keep looking.
Let's say you ignore this advice and buy a recently renovated home. New roof, furnace, flooring, kitchen cabinets, windows, appliances, etc. Everything should be good for many years to come, right?
Three months later you enter the rainy season and the roof starts to leak. The previous owner wanted to save some money and hired a fly-by-night roofer that installed the shingles wrong. The water leaks so bad that the ceiling falls in and destroys the tenant's living room. Additional leaks are coming in around the bedrooms, making it uninhabitable. Your insurance company agrees to replace the roof but at a depreciated value. You end up covering almost $1,000 plus your $2,000 deductible. Your tenant is angry about the whole mess and decides to leave. It takes you a month to make the repairs and another month to find a replacement tenant, another $2,000 lost.
$5,000 in the hole just months after purchase. I've actually seen worse with mold in the attic, an insurance company that fought the claim, and tenants that tried to sue the Landlord. My example isn't far-fetched.
Find a deal that works under the worst-case scenario. If things go well, you'll be ahead. If things go bad, you'll be safe.
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