Buy or Sell Cash-Flowing Property That Needs $30k Repair

Buy or Sell Cash-Flowing Property That Needs $30k Repair

Member since 2020 · 7 posts · 0 votes

This is my first time posting to Bigger Pockets! So excited to use this resource. I read a book by Bigger Pockets 3 years ago on out-of-state investing and bought my first out-of-state investment property halfway through the book. I bought a house only a mother could love in a downtown neighborhood of Oklahoma City. 5 blocks away there is a "district" with clothing boutiques, trendy restaurants, breweries, and wine bars. But the neighborhood itself is still run-down, but less rough than it was 15 years ago and there have been 4 fix and flips on the block since I purchased it. It overlooks a park where there will never be any development in front of it. I put $62k into the rehab plus a $25k downpayment into the 2bd/2ba with a 1ba/1ba unit in back (separate entrance). I officially licensed the back unit as a short-term rental and rent it out on Airbnb and it has at 4.9 rating.

My question is regarding whether or not to keep it based on a major repair that needs to happen. The roof needs to be reframed and redone and the entire job will cost me $30k. I've had multiple contractors come out to look at it. There is a mold issue occurring in the main house utility room do to a shoddy roof job where the second unit was added. I slapped on some gaco roofing stuff where I think there might be a leak and cleaned up the mold in October, but the addition is such a patchwork job that I don't know if it's going to be much of a fix. My current tenant has complained about an allergy - I have mold allergies too - and I do want to make sure I have a healthy place for tenants to live.

Do I sell or do I keep it? Here are the numbers: Main 2bd/2ba - $1200/mo. Airbhb unit 1ba/1bd - $2200/mo ave throughout the year. Total ave revenue $3400/mo. Mortgage payment plus airbnb utilities $950/mo. Profit before what I set aside for 25% running a rental (15% vacancy for the neighborhood, estimated maintenance, etc.) = $1837/mo. The roof/reframing job won't add value, just mitigate to mold and future issues. And, from, what I've read, I only get a 50% return on the roof investment it when selling. The property is already in the top 75 percentile of rent in the neighborhood, so I don't think I can raise it much more. 

What are your thoughts?

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Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
5y

@Allison Ault That's quite a difficult situation to be in. Sorry to hear about it. When you had the home inspected before you purchased it, what comments did the inspector have on the roof? Just curious if it's something they should have caught or if it has become a problem since the inspection. 

I agree with @Forrest Faulconer. I would probably keep the property based on the information you provided. Its cash flowing really well, there is long-term growth potential for that neighborhood, and OKC as a whole is growing. Do you have the cash to repair? If not, I think it would still be worth it - perhaps you could take out a low-interest loan and pay it down over time using those healthy profits. Best of luck with whatever you decide, and please keep us updated!

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  • Real Estate Agent · Oklahoma City, OK · Member since 2020 · 471 posts · 462 votes
    5y

    @Allison Ault

    Hi Allison, sorry to hear about the roof repair, unfortunately, your home may be difficult to sell at market value with such a major repair, any inspection will present that problem. It sounds like you’ve been setting aside money for maintenance, has that included capital expenditures? A $30,000 expenditure spread out over 15 years would have required saving $167/mo. Stresses the importance of accounting for cap ex each month.

    Perhaps you can look at owning it another 15 years, paying back the 30k over the duration, by then you may own the home free and clear.

    If it still cash flows after fixing the roof, I would probably keep it.

    Forrest Faulconer

  • Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
    5y

    @Allison Ault That's quite a difficult situation to be in. Sorry to hear about it. When you had the home inspected before you purchased it, what comments did the inspector have on the roof? Just curious if it's something they should have caught or if it has become a problem since the inspection. 

    I agree with @Forrest Faulconer. I would probably keep the property based on the information you provided. Its cash flowing really well, there is long-term growth potential for that neighborhood, and OKC as a whole is growing. Do you have the cash to repair? If not, I think it would still be worth it - perhaps you could take out a low-interest loan and pay it down over time using those healthy profits. Best of luck with whatever you decide, and please keep us updated!

  • Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Allison Ault feels like a keeper, why sell short when there is clearly a long term upside here? Your profit numbers seem high for a 2 unit but you can easily afford amortizing out the 30K. 

    Get more than 1 quote for the reframe/roof. Maybe also try and find a long time, respected, retired builder to give you an opinion of what to do. They won't want the job and if they like you they can really guide you. Buy them lunch and listen to stories :)

  • Member since 2020 · 7 posts · 0 votes
    5y

    Thank you for the input! I have $20k saved up right now to spend on the roof. At this point, I've been collecting rent on the place for 2 years. The plan was to use that money toward the next property, but I'll just have to push my timelines out. My tenant in the main house will be moving when her lease ends at the end of May so I was thinking that would be a good time to do the roof. I learned a lot about buying a rental property since this was my first one and, unfortunately, some of those were hard lessons. I used a realtor whose family did fix-and-flips - and also owned the real estate firm - and I used her contractor on the rehab. She and her contractor came recommended by a seasoned investor I know. She told me that I wouldn't need to do an inspection because her contractor looked at it and he would get it up to code. Just a couple of weeks ago, I replaced the deck stairs that go up to the second unit (about a 10-foot rise) because I found out those were not built to code - no stringers. The contractor had told me they were fine and did not need to be rebuilt. My friend's brother who is a framer was in town and took a look at it this fall. They needed 4 stringers - the stairs were feeling "bouncy" - and had a few other things going on that weren't to code. When the mold issue came up, I had roofers come out to give me quotes and one of them said it was the weirdest roof he'd seen in 10 years and it needed to be reframed before it needed a new roof. I did get the phone number for a drafter from the contractors who redid the stairs (not my original guy I used for the rehab) so I'll start the process of getting the drawings so I can get quotes and permits. @Jonathan R McLaughlin - yes the numbers are high for a 2-unit because of the Airbnb play with the back unit. That unit would otherwise rent for $650-$700. At it's lowest month, the revenue (before cleaning fees) is $1200 and the highest month is over $3400. 

  • Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    5y

    @Allison Ault I'm glad to hear that you've soaked up the lessons here, but I'm sorry it came through a toilsome path!

    Thinking through your roof quotes . . .$30k for a roofing repair seems excessive.  I'm assuming that you could remedy the issue with the add-on integrating with the original structure with reframing only the back 1/3 to 1/2 of the home.  Adding new decking and shingles onto the home (assuming it is NOT a flat roof) I'd expect to see you looking at $17,500-22,500 on the high side.  

    Have you gotten MULTIPLE quotes here?  Have you gotten quotes from multiple different types of companies?  (i.e. ones you see advertising on X, other's you don't)?

    Last thing I'll lob over to you:  have you interacted with your insurance company here?  Mold issues are no joke, and are likely something covered by your insurance and if they could help with the cleanup, that would likely include a portion of the roof repair.  It'll be an uphill battle, but in the end that really is the kind of stuff insurance companies "are here for."

  • Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Allison Ault woof, thats an education and a half. Feel your pain and hang in there. Not sure if it would work, but you could try to get a refinance loan where they incorporate the improvements. You have some numbers to support a high value, and you have some money to kick in if necessary, so it could work? Portfolio, local bank type loan.

    Good luck!

  • Daniel SmythPro Member
    Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
    5y

    @Allison Ault

    Replace the roof!

    The mold issue ends when moisture ends. Since you may not be the one to mitigate the mold issue, understand that mold is not the end of the world.

    For reference, mold travels with dust.

    You can minimize some dust with a bleach/water mist. Wear a respirator that has replaceable or cleanable filters. Your covid mask is just for looks! Wear gloves to keep your hands dry and so you can grip the trash.

    Dispose of trash in garbage bags as you would household trash.

    Some areas, even if they are black in color, can be saved if they are saturated with bleach and allowed to dry.

    Staining is prepped with Kilz after mold is dead.

    Professional mold people will have more steps and do much more, because the average investor just wants the problem gone.

    Message me with pictures and questions if you need assistance and will do the mold mitigation yourself.

    Get the roof done by a licensed professional that pulls permits. If you don't stop the water, the mold just comes back!

    Merry Christmas!

  • Member since 2020 · 7 posts · 0 votes
    5y

    Thanks everyone for the feedback! @Jonathan R McLaughlin I've contacted lenders about doing a cash-out-refi. When I purchased the place 20 months ago the rates were higher and I was locked in at 5.4% I should be able to get a rate a couple of percentages lower so it really won't affect the monthly payments much. The neighborhood has appreciated (thank you free-market medical weed?) so I have plenty of wriggle room to take out the cash I think I need to do the roof.

    @Daniel Smyth thank you for the info on dealing with the mold! I had a mold inspection done when my tenant first mentioned her allergies. The spore density was lower than the air outside, but a month later when I came out I could see pink stuff forming on a few walls in the utility room. On the report it said it was not a mycotoxin. I sprayed them with bleach and then with Kilz. I also applied the Gaco product on the seams of the weird flat part of the roof above, but that was in October so I have no idea what the walls are looking like now. The kitchen had an even lower spore count, and from talking with a remediation professional he said it was extremely low for a report, but it was a mycotoxin. He identified some mold behind the dishwasher by flashing a light under it and I was advised not to move the dishwasher and to rent a HEPA vacuum if I decide to do the remediation myself. The wall the dishwasher sits against is the exterior wall of the original house where the previous owner added the addition of the guesthouse and did some weird things with the roof. The dishwasher was new and installed by the retailer so I don't know if it has to do with the roof or with the dishwasher.

    @Will Fraser Thanks for the advise on the roof. I'm contacting a drafter in the area to get some drawings. That way I can get more accurate estimates from contractors. The roof is old, and it has new"ish" shingles on it, but it needs new decking and not just the part that gets reframed. My GC said he had roofers and they could do the roof after I got it rented out, but working was him was such a mess that I didn't want to use him again. When I talked to my insurance company - I told them roofers came out and said there was hail damage - they said they would only cover actual cash value. One of the 3 roofing companies that looked at it advised me not to involve the insurance company until I had the cash ready to fix it because they could determine it uninsurable and give me a short timeframe to get it done. Based on that information, I was planning on talking to my insurance company more in depth a week or two out from when I have the work scheduled. 

    Here's a photo of the roof. The guesthouse was added by the previous owner (pink door) and then an extra section at 7:00 from the the circle. I circled the area where there is mold behind the dishwasher and then on the ceiling in the utility room (utility room is directly under the guesthouse and a flat portion of the roof where the window is in the middle of the circle). I also noticed some pink mold forming on the utility room walls that those exterior stairs are attached to. There's no roof attached there so I'm wondering if there is an issue with construction of that wall. I removed that odd pile of bricks and also a bunch of roofing shingles under them. Looking back, I now wonder if they were placed there to conceal or hide something. 

  • Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    5y

    Goodness I'm sorry for the mess of a situation this is, @Allison Ault!  

  • Member since 2020 · 24 posts · 16 votes
    5y

    I thought the estimate was really high until I saw the picture (I'm an ex roofing contractor).  There are a lot of roof planes that are converging at one location.  I'm guessing it holds water along the wall.  I'd prepare yourself for some rot and the need to do more than just fix the roof. Guessing that's what led to the $30k estimate.  One of your previous post said that was the weirdest roof they'd seen in 10 years- I'll second that.  Can you post more pics? maybe from the roof looking at the window?

  • Member since 2020 · 7 posts · 0 votes
    5y

    @collin maas thank you for your reply. I have some on my phone from the last time I was down there. (1) From this angle, I'm standing on the stairs and taking a photo of the flat part of the roof in front of the window. (2) I also have a picture of the mold right below it in the utility room. (3) Here I'm standing on the flat roof facing the window. (4) Here I turn to my right 90 degrees from the window. This is about the spot where the mold is in the utility room below. But the ceiling is lower than that - maybe by 3-4ft. 

  • Member since 2020 · 7 posts · 0 votes
    5y

    I should mention the water from that flat roof drains into the little downspout in this photo. It's about where the circle is in photo #4

  • Member since 2020 · 24 posts · 16 votes
    5y

    My guess is more water will pool on the flat roof than that little downspout can handle.  Not sure how many major rain events you get in Oklahoma, but if its one of those several inch per hour types, I bet you have several inches of standing water on that roof. Possible solution- add a roof drain in the flat roof.  This will require completely removing the flat roof portion and resloping to the new drain not to mention a bit of plumbing.  I'd recommend using EPDM (rubber roofing) run it up the side walls all the way to the pitched roofs.  Still going to be a bit of cost and you will have no idea what condition the roof decking and walls are in until you open them up.  

  • Member since 2020 · 24 posts · 16 votes
    5y

    Thinking about this a bit more. Skip the roof drain.  See if you can find a roofer to price the following scope of work

    -Remove existing flat roof system to deck and replace any damaged decking or structural members

    -Remove all roofing material & wood siding from side walls replace any damaged wall sheathing or structural members

    -Provide new through wall scupper at location of existing downspout. Rework existing downspouts to work with new scupper

    -Provide new tapered polyisocyanurate (also called ISO -very common roof insulation) to provide drainage to new through wall roof scupper.    You could also ask for a base layer of ISO to provide extra R-value

    -Install new fully adhered 60mil EPDM roof membrane. Roof membrane should be install up side wall on all 4 walls and terminated at the top with termination bar and water stop. (roofer may want to use some of the other abbreviations for roof membrane TPO or PVC -they'll work fine also. I just always found EPDM to be the best bang for the buck) 

    Getting rid of everything wet should solve the mold problem, moving the water out of that area should keep it dry. 

    I think you should see estimates between $5k-$10k.  I'd be just as weary with an estimate of less than 5 as I would be with one over 10.  I'd be prepared for some extras also could be very rotted under there.

    Good luck with whatever direction you go

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