Should I buy this property that needs a new roof and HVAC?

22 Replies

Hello,

The seller has accepted my offer of $121,200 for a 3 bed/2 bath townhouse. I initially analyzed with the following information and the property yielded a ~$420/mo cash flow and a ~15.7% cash on cash return:

Purchase price: $121,200

Closing cost: $7,800

Loan: I am putting 20% down for a 30 year loan at 3.625%

Estimated Rent: $1,400

Property tax: $135/mo

Insurance: $54/mo

(Assuming 5% Vacancy, Repairs/Maintenance, Capital Expenditures and 10% for a Property Manager)

At first, this property seemed good on paper until the inspector said that the AC, furnace, water heater, and roof are at the end of their life and will need to be replaced in the near term. I obtained an estimate to replace all of the previous items and it will cost roughly $18,000. I signed the contract for buying the property as-is so I don't think the seller will pay for any of these so I am wondering if I should continue to proceed with this purchase.

Paying an additional $18,000 will maintain a ~$420/mo cash flow but will reduce my cash on cash return to ~10%. However, this should also reduce the amount money I set aside for Capital Expenditures since everything should be brand new (which in turn, would increase my cash on cash return but I didn't account for this to keep the analysis conservative).

Please let me know if I should buy this as my first investment property.

Thank you

Hi @Timothy Mitchell congratulation on your first post, first potential investment property and welcome to BP! 🎉

I don't think anyone can make up your mind for you. However, here are a few things to think about:

 You should absolutely speak with your real estate agent to ensure you have the option to exit the contract.

What is your buying criteria? For example: "Two Story Single Family Colonial Homes with at least 2100 sq. ft. within a 3 mile radius of the interstate without an HOA with less than $15,000 renovation that $450 cash-flows/month which I can purchase for less than $350,000 in the zip code 22407".

Is $420/mth below or over your baseline/worth it/ideal cash-flow per door for your criteria?

Is a 10% cash on cash return ideal for your buying criteria?

What is your level of comfortability with the purchasing decision?

What is the maximum you are willing to put into fixing up a place?

Were you looking to make repairs soon after purchase?

Communicate with the owner (through your agent) about the unexpected CapEx to attempt additional deductions.
The CapEx sounds like a pain point for the current owner, as an investor you can remove that for them. Helping someone with a distressed property is what being an investor is all about in my opinion.

Hopefully that helped. Let me know if you have any more questions.

Good luck!




Completely depends on your strategy and goals. You can also compare the cash on cash to other rentals selling in the area to see if it comparable. Have you looked into rolling a portion of the repair expenses into the loan in order to increase the cash on cash?

@Timothy Mitchell  You said 

"inspector said that the AC, furnace, water heater, and roof are at the end of their life "

Just remember inspectors dont know much about furnaces , AC units , water heaters other than looking to see what year they were made . My hot water heater in my house is 25 years old , when it breaks , I will replace it , Furnace and AC are about the same .I will deal with it when it happens . The inspector guessed at the roof , It could be good for 5 or 10 more years .

In the mean time if everything is working and you have it rented , you are making some cash flow . Not everything will go at once . ( Unless the gods hate you ) 

EVERY house you will look at , things will have to be replaced at 1 point in time . And maybe a second or third time . You may spend 2 grand this year , 4 grand the next , and nothing at all the next 2 years . 

I just spent $31,000 on roofs . It was painful , but I knew it was time . I just put away for that expense over 10 years . But in those same 10 years I was collecting rent .

Dont over think your numbers . Have reserves . 


I appreciate the responses from you guys!

@Deneuve Brutus

I am comfortable with a ~$420/mo cash flow and 10% cash on cash return since I feel like it would be hard to find a property with similar numbers in this market. I plan on speaking with my realtor to see if I can have the seller pay for some of the closing costs.

@Dan Travieso

I haven't considering rolling portion of the repair expenses into the loan but it does sound like an very viable strategy to pursue. I will look into this.

@Matthew Paul

I plan on replacing the HVAC units when they break so it won't be an immediate expense. However, the inspector noticed indications of a leak from the roof and mold in the attic so replacing the roof seems to be right idea.


I don't look at cash-on-cash to determine whether or not a purchase makes sense. The cashflow earned from collecting rent is nothing compared to the profit from appreciation plus annual rent increases. You have to do the math for 5, 10, 15 and 20 years to see how much you will earn.

There was just a recent post where the owner was making a $430 per month positive cash flow and was calculating the cash-on-cash and not the appreciation while the property increased and he earned almost 1300% on his investment plus his positive cash flow.

If you can afford the property, afford to make the repairs and the property appreciates by even 3% per year it is most-likely a super good deal in today's market.

I just sold about 24 homes in Las Vegas and the home inspectors are so full of b.s it made me sick. Inspectors for two of the properties told the buyers that new water heaters were necessary only because there was  very little corrosion on the water pipe nipples on top of the water heaters.

Just last week, one inspector made be get mold testing because he said a black mark on the door where the door was closing against a 2 inch x 1-1/3 inch portion of the door appeared to be mold. I told them the black mark was where the door was closing against the door, but they still made me pay $350 to test for mold.

Since inspectors represent the buyers, I think they are biased and flex their muscles far too much. They don't have crystal balls and cannot determine the length of time an air conditioner or roof will last by looking at them. I am a heating and AC contractor and rusty coverings on motors and equipment is not an indication that the equipment is on its last legs.

Suppose, the inspector is wrong and you could make $150k from appreciation and cashflow in the next 5 years.. Suppose, you could make $150k from appreciation and cashflow in the next 5 years and you only need to spend $20k for repairs.

Stretch out your numbers 5, 10, 15 and 20 years and you will have your answer,

Originally posted by @Timothy Mitchell :

I appreciate the responses from you guys!

@Deneuve Brutus

I am comfortable with a ~$420/mo cash flow and 10% cash on cash return since I feel like it would be hard to find a property with similar numbers in this market. I plan on speaking with my realtor to see if I can have the seller pay for some of the closing costs.

@Dan Travieso

I haven't considering rolling portion of the repair expenses into the loan but it does sound like an very viable strategy to pursue. I will look into this.

@Matthew Paul

I plan on replacing the HVAC units when they break so it won't be an immediate expense. However, the inspector noticed indications of a leak from the roof and mold in the attic so replacing the roof seems to be right idea.

 Your welcome!

Originally posted by @Michael Plante :

I would not buy it 


many much better deals in my opinion 

 Thats the difference in areas . Where I invest south of Baltimore , I bought a house vacant , total gut , overgrown yard with the dreaded bamboo for $140K and I didnt even look inside . I got a great deal . 

You’re not spending $18,000. How much more would the property be and how much more would you pay if it and new roof, water heater, ac and furnace in the listing? $10,000? $15,000? You MIGHT be spending $3-8k more than you planned. You MIGHT be spending less. The bad roof/ac/furnace/water heater might be the only reason it’s cheap AND the only reason someone didn’t buy it before you or offer more as their primary. The fact you can afford to pay those $18,000 in repairs and others can’t gives you access to more deals. 

Of course I would go ahead with the deal. But I also would have a roofer and an ac/furnace guy out to say. 1) this part had to be fixed not, this part will fail in the next so many e]years, and each part will cost this. The water heater is a non-issue. They cost less than a $1,000 and fail every 6-8 years< so hey are always near the end of their life. 

Originally posted by @Bill Brandt :

You’re not spending $18,000. How much more would the property be and how much more would you pay if it and new roof, water heater, ac and furnace in the listing? $10,000? $15,000? You MIGHT be spending $3-8k more than you planned. You MIGHT be spending less. The bad roof/ac/furnace/water heater might be the only reason it’s cheap AND the only reason someone didn’t buy it before you or offer more as their primary. The fact you can afford to pay those $18,000 in repairs and others can’t gives you access to more deals. 

Of course I would go ahead with the deal. But I also would have a roofer and an ac/furnace guy out to say. 1) this part had to be fixed not, this part will fail in the next so many e]years, and each part will cost this. The water heater is a non-issue. They cost less than a $1,000 and fail every 6-8 years< so hey are always near the end of their life. 

 We all do things differeny 

I like to learn as much as possible 

You buy properties for 1% return?


@Michael Plante

No, I don't buy properties with a 1% return. Are you talking 1% COC? COC doesn't matter in my experience. I've gotten a great return over the last 7 years on a property with NEGATIVE $800/mo cashflow. It brings in $36k in rent, gives me a $20k/year profit, and has appreciated more than $200k. All tax free because of depreciation.

A property that cashflows $200/mo is a negative cashflow property with one bad ac unit, 6 weeks of vacancy or any of a dozen other things you will encounter. IMHO, anyone that needs a property to cashflow $100-$200/mo isn’t ready to own a rental property. It can be nice, useful, or good, to cashflow, but it can’t be needed. 

Just get 2-3% inflation rate appreciation on your 20% down and you’re getting 10-15% tax free return, pretty good in most books. Buy in a decent location and get 5-10% per year and you’re earning a 25-50% return. 

If you're stuck on COC for some reason, wait 2-3 years and pull all your money out with a refi and you're making infinite COC, wow isn't that great? I mean you're earning less income because you're paying more interest, but you can tell your friends about your COC.

Originally posted by @Bill Brandt :

@Michael Plante

No, I don't buy properties with a 1% return. Are you talking 1% COC? COC doesn't matter in my experience. I've gotten a great return over the last 7 years on a property with NEGATIVE $800/mo cashflow. It brings in $36k in rent, gives me a $20k/year profit, and has appreciated more than $200k. All tax free because of depreciation.

A property that cashflows $200/mo is a negative cashflow property with one bad ac unit, 6 weeks of vacancy or any of a dozen other things you will encounter. IMHO, anyone that needs a property to cashflow $100-$200/mo isn’t ready to own a rental property. It can be nice, useful, or good, to cashflow, but it can’t be needed. 

Just get 2-3% inflation rate appreciation on your 20% down and you’re getting 10-15% tax free return, pretty good in most books. Buy in a decent location and get 5-10% per year and you’re earning a 25-50% return. 

If you're stuck on COC for some reason, wait 2-3 years and pull all your money out with a refi and you're making infinite COC, wow isn't that great? I mean you're earning less income because you're paying more interest, but you can tell your friends about your COC.

 Sorry I don’t understand all the numbers you posted 


I was looking at the above it seems the house will cost approx $180,000 after closing costs and rents for $1800. I thought that was 1%?

@Michael Plante

Sorry, no. You are confused. That 1% "rule" has turned in to a running joke. It used to be a fast way to tell if a property would be profitable. It has nothing to do with actual returns because it doesn't take in to account insurance or property tax rates, building age or condition, maintenance costs, HOA fees, any utilities, etc etc etc.

You can get a 1% rent to purchase price in war zones, or old town or many small towns, anywhere prowprties are really cheap, but you will probably still lose money. (The roof, the sc or the furnace for a 2000sf home doesn’t care if the house cost $50k, $250k or $500k.) so you’ll do better getting $2800/mo on a $400k house (0.7%) then you will getting $500/mo on a $50k house. 

You can do just fine getting 0.6 or 0.7% rent to purchase price in Las Vegas because…

No state income tax, very low property tax, low insurance rates, stucco siding and tile roofs than last 50+ years, no maintenance landscaping, no tornadoes, hail or snowstorms, properties are considered old here at 20-30 years, not 100 like some areas. 

On the other hand if you get 0.6% in an expensive to insure, high tax area with bad weather and old homes you’re probably going to fail. 

I dont know where this house is but you can buy repair insurance for furnace and ac, water heater does not cost that much, only roof might need immediate attention  so I would still go for it, if you thing it is a good deal.

I want to note that even homes that are sold "as-is" doesn't mean you can't come back and renegotiate.  The homes that are sold this way generally mean that the owner doesn't have the capital to put into the home and/or the sellers don't want to deal with anything. That is different than saying you have to pay a certain price and stick with it.  So, I'd take those quotes (that are high in my opinion) and object to the deal and ask for a price reduction - noting that you'll still take care of the fixes and everything else with the property.

@Timothy Mitchell

Just because a house is sold "as-is" does allow you to negotiate as long as it is before the contingency periods expire.
He can of course say "no" to any negotiations. It doesn't hurt to ask.

Regarding future replacements that need to be made - The improvements may need to be made tomorrow, next year or even in 5 years.
It may be good to have a contractor go in to see the actual items that need to be replaced and what can wait.
Spreading out the replacements over a couple years is better than them all having to be done tomorrow.

Good luck in your purchase.

@Matthew Paul Hi, inspectors certified by a national acredited association do know enough and the majority are ex contractors that stay busy in the field after selling their business. They are required to have X amount of recurrent training every year, depending on the state.

If you look at the manufacturer recommendation they wont guarantee some of this equipment after a specific age, that released them from liability, the insurance will flag some of this items because of the age as well and they can exclude or prorate coverage. That is what they like to do, I have experience this personally.

Example, the water heater leaks, create damage, mold, remediation, etc.. what they will tell you, you should replace or performed preventive maintenance on the unit, no proof of it. there goes your claim down the tube.

Also, I am sure you do not like to have a furnance leaking CO2 in to your home, then get sue over an old furnace that will cost around 3K.

The best thing is to perform preventive maintenance and have a log on the unit itself, install CO2 and water sensors that can be monitored with an app like a video camera and budget for replacement one thing at a time. This water sensors are relatively inexpensive and are great. Awesome idea for homes in the north because they can even close the water supply if needed.

Remember Murphys Law, it will happen when you are on a trip far away or when least expected. Happy tenants mean peace of mind.

@Reinaldo Lopez All the home inspectors I have run across havent worked a day in construction in their life , they took a course from a home inspection association and got a piece of paper . 

 I had one tell a customer that there was no hot water heater and one needed to be installed . He was partially correct , there was no separate hot water heater , the boiler had a heat exchanger for hot water . 

Had one that wrote up 15 things that were not built  to code . I asked him to show me in the code book , but I had to explain to him he needed the code book from 1959 . Since thats the year the house was built . (Of course the house wasnt up to 2020 code ) 

When you read all the disclaimers in their "report" why waste your money . 

Want a true evaluation of a house , call a licensed plumber , electrician , HVAC , and a general contractor , cost you more but you are getting a state licensed professionals opinion