How does a new roof affect the return on my investment?

Question

I have a buy and hold that we bought towards the end of the year last year. We know it will eventually need a new roof, maybe the next few years? We have another buy and hold that we recently bought and is getting a new roof. They will give us a discount to get both done at once.

The recently bought home had the new roof as part of the money to get ready already estimated in to calculate the return on investment. So, the question deals with the second new roof.

The cost is approx $16k with a $3k discount making it around $13k for a new roof on the house and garage and everything that that includes.  We have cash to pay that (it would not be from rent saved as the home was rented out in January of this year. I've made all my calculations based on the 50% rule but of course the maintenance share hasn't gotten high enough for $13k yet.

How does this affect the return on investment? It would be another $13k put into the home, but is that considered part of the 50% rule that is for maintenance or how does that part work? We can hold off doing this roof of course, but I like the $3k discount for getting it done in addition to the other one we recently bought that DOES need a new roof.

If I were to get a loan for the cost of both roofs, that would add to the payments coming out every month from the rent, but it would reduce the amount overall spent. The first house would have lower rental-ready costs and the second one would not have the additional coming out of our pocket. What kind of loan would that be and how does that work? I was thinking a local credit union at 2% or so, is that the same as when someone gets a car loan or different?

What are your thoughts on this and do I recalculate the ROI or is it the same because of the 50% rule?

Gabe G. · Answer

Roofs are capex. And the cost of them should be ran over the life of the roof. 20-30 years.

Then you can break this big expense down into a yearly/monthly expense and make sure you are still ok.

But the short answer is a 13k roof, is going to kill your cash flow, over the next few years. However, if this is a long term investment, you must fun the cost of the roof over the life of the room, to make sure the investment makes sense.

Therese V. · Answer

Thank you for explaining that. I didn't realize those types of things should be spread out when figuring out the return.

It is a long-term investment that we will eventually 1031 into an area near where we actually live.

Pat L. · Answer

Personally it sounds like a great opportunity...

We were able to get a large vacant (separate utilities) 1830's home with another attached to it for $48k cash knowing it was going to need a new roof. Originally listed for $68k to settle a divorce, other offers subject to financing didn't make it, & our Ins Carrier refused to cover the roof.

We went 3 years fully rented @ $850 & $675 before the inevitable happened during a week of heavy wind & rain. $10,900 for both roofs, including temporary tarps & all new sheeting. Then we sold it to an investor for $71k (holding the note @ 12%) & his insurance carrier covers the new roof.

Therese V. · Answer

Thank you for your response. The total is actually the entire price for 2 house roof, 1 side of a house new siding, new gutters, chimney flashing, and a complete garage roof with soffets etc. All roofs require tearing off the previous layers of roofing.

We can't wait on one house because we have lost our insurance because they wouldn't wait until it stopped raining to be able to actually get a new roof. There has been no rain damage or anything but that is their policy.

Gabe G. · Answer

Boy that was some awful spelling.

Also make sure to get multiple quotes. There is a pretty big profit margin on roofs, you may be able to get it done cheaper.

Bill S. · Answer

@Therese V. $16K for a new roof sounds way high for me. I know I'm not in your area and I know there are some roofs that cost $16K but have you shopped around?

If they truly cost $16K then figure out your break even point on interest vs the deduct saved by doing two roofs. I have a 5 year loan for a fixup that was about $15K and payments are about $300 per month. Now granted a large chunk of that is principal but if your roof lasts just one year, you are cash flow ahead to wait.

We don't get near as much rain here as you do but it's my experience that roofs leak around the edges like flashing and eves. If those are in good condition you might be surprised how long the roof will last. I've seen some very ratty roofs still turning water and at the same time I've seen new roofs leak (due to improper flashing).

If I were you I would 1) get 4 more roof estimates 2) wait on the existing roof and conserve borrowing capacity and cash flow.

Therese V. · Answer

Thank you for your response.

We've been at this for almost 2 years now and have 3 buy and holds, so our reserves aren't enough to cover the costs of the roof for either house. If they were enough, we'd just use the reserve money the way the 50% rule is designed to work. We haven't touched the reserves for anything else.

So, if we do a loan for the cost of the roofs, they payment is just deducted from the monthly cash flow but if we pay cash that will affect the final ROI number in the calculations? It seems the better thing to do is get the loan for the total of the 2 roofs so that we aren't fronting the cash directly. We had already figured in $7k for the roof on the recently bought house so taking the loan there would actually raise our ROI I believe?

Aaron Montague · Answer

@Therese V.

The roof affects your ROI directly.  And obviously takes a big chunk out of your Cash Flow.

There are a few tax benefits. You can depreciate the costs of the roofs over 27.5 years.

Every month you need to be saving some money for future Capital Expenditures (Cap Ex).  This money is ONLY for fixing roofs, replacing furnaces and big ticket replacement items.  Put this money in a separate account and never touch it.  If you own the place long enough you'll need to replace the roof again(16k), replace a water heater (800) and replace the furnace(5-6k).

Your repair loan is probably going to be more than 2%.  But if you can get money from them at 2%, go there with several wheelbarrows.  to adjust your Cash Flow and ROI you need to subtract the payments from the profit you get each month.

How does a new roof affect the return on my investment?

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