Inspections on cheap properties

[Brad E.]

I'm sure opinions vary widely on this but just wanted to get some feedback.  I'm in contract on a C class duplex that was build in 1966 in GA for 50K.  Went to check it out the first time today for myself and I can see with my untrained eye it needs quite a bit of work but it is occupied currently.  I'm wondering if it is worth it to even get an inspection. 

I'm sure the inspection will uncover myriad things but most of it I will likely not fix.  Just questioning myself if it is worth it to pay a $550 inspection.  The main positive I see of doing it is using it as a tool for price negotiation.  I've already done a decent amount of negotiating with the seller before getting it in contract and they seem pretty set on the price, so I dont know if I can get it any lower even with an inspection report.  Other than that it almost feels like a waste of money, but maybe that is just ignorant....

Where do you guys draw the line on whether to inspect or not?  Thanks!

[Marcus Auerbach]

John is correct, on these types of properties capex can exceed cash flow over time, so you are looking at a net loss. The nasty thing is that you won't realize it until several years in.

We have a lot of these in Milwaukee in an area generally referred to as the inner city. People ask me to check their numbers and are worried if they have the right amount for water and sewer, but are not even questioning the 5% capex on 2x$600 rent. Because someone else on BP said 5% is a good number.. (that was perhaps on new construction in Arizona and also 5% of a much higher rent..)

Everything in a house has a finite design life and will have to be replaced at some point. A roof may last you 20 years (and not 30 for a cheap three tab, which is what you typically find here), plumbing will last 60 - but either will go at some point. Depending on how much the previous owner has spent before you, over the lifetime of your investment you will probably spend $35 to $50 per square foot, plus inflation. Do the math: $550 for home inspection is not your concern! 

Chances are this is going to be more than your cash flow on a 50k property. The only corrcet way is to make a list of all capex items - from new roof to new driveway - and scedule them out over time and then calculate a monthly reserve for capex. 

A more expensive property has better ratios: rent/repairs, rent/capex, property value/capex, appreciation/capex, etc..