Problems with a property to avoid when buying

[Collyn Bennett]

I've been looking for my first deal and found an interesting property. It's a house with a detached garage that has been converted into an apartment. Both buildings need to be gutted and completely redone. All the repairs looks like they're just cosmetic. The property is listed at a good price though so even with a good chunk going to rehab the deal works. This would be my first BRRRR property and I can tell just from pictures that it will need a lot of work. My question is what kind of problems should I watch out for due to hefty repair costs or long term issues? Things that come to mind are foundation issues, septic issues, etc. What are things you avoid no matter what?

[Joe Villeneuve]

I avoid mold, foundation, old electrical, septic...basically anything that involves repairs that are behind drywall or underground.  Things I can't see.  If it looks like the roof is fine now, bu will need replacing within the next 5 years...replace it now.  Why?  If you replace it in 5 years, you'll be repairing any damage done on the inside, and you'll be coming out of pocket for all of it...plus interest if the source is a loan.  That's accumulated profit...washed away.

Why replace it now?  The cost to you will be whatever the added financing is per month...which is being paid by the tenant anyway.  This just reduces your cash flow every month...but you're not coming out of pocket...and, the actual costs to the deal is insignificant.

Example:  Cost to replace roof = $5000

Option #1:  Replace in 5 years, when it starts leaking.
Cost to you for roof:  $5000
Cost to replace/repair interior damage:  $3000 (floor, paint, etc...)
Interest on funds: $1800
Total cost out of pocket:  $9800
Cash flow for 5 years (before roof repair):  $5k/yr = $25,000
Adjusted Cash flow for 5 years (after roof repair): $5k/yr = $15,200

Option #2: Replace now, before it starts leaking.
Cost to you for roof: included in purchase
Cost to replace/repair interior damage: $0 
Added O & I to purchase loan:  $24/month; $288/year
Total cost out of pocket: $0
Total cost added to loan over 5 years:  $1440
Cash flow for 5 years (before roof repair): $5k/yr = $25,000
Adjusted Cash flow for 5 years (after roof repair): $5k/yr = $23,560