Establishing Budget For Improvements

[Jonathon Klem]

I recently purchased my first property. I factored in mortgage, taxes, CapEx (at 3% per year of purchase price), and a 5% vacancy and I'm looking at a 13.69% Cash on Cash return.

When I purchased the property, there was already a tenant there, and she's been living there for about 2 years now.  I had her sign a new lease with me and so far everything's been good.

When I purchased the property, I knew there were some cosmetic issues.  One of the first things I did was replace some of the siding that was messed up (only cost me $45 in labor and $20 in materials thankfully).

Now, the only 2 things that the tenant has mentioned that she'd like fixed are the front door which doesn't close properly and has a storm door that doesn't even 'lock' into place (the holes don't line up so it never can actually close) and there's a wall in the bathroom that has a bit of water damage and needs some new drywall and the ceiling in the bathroom needs new paint.  

I got a quote for ~$400 or so to fix the bathroom and I'm calling around on the door but it looks like it could cost $500-900 to replace the front door.

I'm torn now if I should do both of these repairs the first year or if I should maybe rein in the budget and make sure I'm saving money towards long term capex items like a new roof in 7-12 years or so and other things that could be coming in.  I definitely want to fix the bathroom since that's officially broken and needs repair, but I think they can live with the door situation for a while (as made evident by the fact that she's been living there for 2 years).

I'm not too concerned about spending the actual money, but from the perspective of managing the property, I'm curious if I should try to have my first year be cash flow positive, since I've lucked out and had 0 vacancy so far. 

I'm also curious about what my play should be here.  Since I've read that a lot of people buy a property, spend thousands to tens of thousands on renovations and then rent it, I kind of feel like if I can spend ~$2-5k on repairs and renovations to bring the property value up I'm still in good shape.  But part of me feels like that's a bit of a waste since it's already rented (I guess everyone has a little slum lord in them).

I was also thinking about the spare cash flow going forward.  Would it be wise just to save this up for money to buy another property/emergencies or to budget renovations in the future to increase the property value with hopes of refinancing out my money at a later date?

A bit of background, this house seems to have the most beds/baths in the surrounding area.  I bought it for $49400.  It's 2356 sqft and has 4 beds and 2 baths and is currently renting out at $700/mo.  There aren't a lot of 4 bed 2 baths for rent in this area, but I did find one at an apartment complex on another end of town for $850/mo and there are some SFHs in that range for $1200/mo but they're in much nicer neighborhoods.  I think that I'm renting it out right now towards the top of the market for that specific area, but if I were to do about $12k in repairs I could likely bump that number up to $800-$850/mo.

The neighborhood is OK.  It's adjacent to some crime areas, but in the surrounding blocks it's not bad.  Regarding available appreciation, the houses surrounding it range are in the 55-75k range according to the county assessor.  One house across the street apparently is valued at 76900 and has 2 beds and 1 bath.  The house right next door is valued at $59400 and has 3 beds, 1 bath and about 900 less square feet.

Basically my question is the age old: "Should I focus on cash flow or appreciation", however, I feel like my situation is slightly unique given that there may be room for forced appreciation and I purchased it with a tenant already in there.  Any words of wisdom would be greatly appreciated.