Cost of Capex items in midwest?

Question

Hi everybody

I am new to real estate and am thinking of purchasing turnkey homes out of state.

Specifically, I live in NY and want to buy in KCMO and Indy.

I have been evaluating several TK houses in the $50k to $60k range and the net monthly cashflow is coming out in the $200 to $250 range. For this I am assuming 20% downpmt, 10% vacancy, 10% repairs and about 8% to 10% prop management.

Anyway, my question is what do you estimate the cost of replacing a roof on a typical $50k home in these cities? What about the cost of replacing the water heater?

The obvious concern here is the ratio of CapEx to the net cashflow. Is it possible that a roof replacement can wipe out 4 years of cashflow?? If so then I do not see the value of such an investment. It is more like a ticking timebomb (?)

Vinay M. · Answer

@Scott Trench Thanks that article is spot on in discussing this issue.

They say that to keep ahead of CapEx expenditures you basically need to be making at least $1,000 per month in gross rent. Using a conservative 1% rule that would be a $100k house.

I guess that supports the argument that owning a fewer number of expensive houses is typically better than having a large number of cheap houses.

But I think there is an optimal point - one shouldn't go too expensive or high-end where you  could end up dramatically reducing the pool of potential tenants.

Mike H. · Answer

Cities tend to cost a lot more. But in the midwest, you can typically find better deals than that. I'm paying between $225 to 250 a square for tear off roof. That includes tear off of 1 or 2 layers. Dumpster. Architectural shingles and the ice/water shield.

Most of the towns by me are no longer allowing layering over existing shingles now.

One other thing to note though. When you buy the house, you should be looking at your capex items. If your roof only has 4 years left, then you want to account for that in your price - especially if you're buying turnkey homes out of state.

With turnkey deals, you're basically paying retail. So you want to find homes with newer roofs, hvacs and maybe water heaters.

Also keep in mind, when you buy a house and your rental profits are $200/mo, that doesn't mean your rental profits are going to be $200/mo forever. They're going to go up as your rents go up over time and your payments stay the same.

Matt M. · Answer

WOW! I just replaced one on a 1300 sqft Denver home with a steep pitch. Roof was $4500. Removal of 3 layers of shingles and 1 of wood shake plus a new deck was another $4500.

Account Closed · Answer

The cost of replacing the roof is going to correspond to the size of the house.  Other factors may include the pitch of the roof and the roofing material used.  It could also cost more if there are multiple layers of shingles underneath.  Another factor is it will also depend on whether or not the roofers need to replace slats with sheathing to bring the roof up to building code.

In Southwestern Indiana, I have property that's about 850 sq ft where I've been quoted approx. $4,500 for a new roof.

In Denver, Colorado (where I live), I/the insurance company paid $14,000 to replace the roof on my person home (710 sq ft).  I had to replace slats with sheathing and had two layers of shingles.

Scott Trench · Answer

I think that another way to phrase the OP's question is this:

"On low-cost property in areas that produce low rent (AKA "2% rule" properties) doesn't CapEx pretty much cost the same as in expensive areas and thus wipe out years of cash flow very quickly?"

Or

"Can I make Money Investing in $30,000 Properties?"

(Excuse me - $50,000 properties)

I'd advise you to read the article above, by @Ben Leybovich. It answers the question you are asking in great detail. You are wise to be asking it.

Larry Fried · Answer

Vinay Munikoti You are right to be concerned about houses in the price range you are thinking of in both KCMO and Indy.  That price range is going to be houses in fairly rough neighborhoods and with a difficult tenant base.  Capex will not be your only concern.  High turnover, vacancy, tenant destruction and repairs should also be of concern.  As a long time out of state investor,  these rentals are best left to those who live close and have the time and energy to manage these rental homes.  To get in the better neighborhoods look to TK homes at least $75k, rents $850 and above in those markets, or there abouts.  IMHO

I did find a way to passively invest in the lower price homes without the headaches and with much lower risk, and you can read about my investments in my blog articles:

Have I Found the Holy Grail of Passive Real Estate Investing?

Vinay M. · Answer

interesting. can you PM me the name of this company.

Thank you

Owen Dashner · Answer

I pay around $180 to $200 per square for 1 layer tear off, replacement with 30 year architectural and ice/water shield.  That includes dumpster.Keep in mind that hail/wind damage to roofs can often be covered by insurance claims, so it isn't necessarily going to wipe out several years of cashflow.  Your premiums will often shoot up afterwards, but at least you aren't the one writing a check beyond your deductible (and you may be able to recover the deductible out of pocket cost as well).

Vinay M. · Answer

^

Cost of Capex items in midwest?

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