Capitol improvement effect on 50%

[Ed L.]

I've been thinking over the 50% guideline and have spotted a hole in the analysis.

Say for example there is a house for 50k. House rents for $800 x 50%=400. P&i $300 and $100 cash flow. Good deal right?

Now lwts assume The house is 20 years old and all the mechanical systems are nearing the end of their service life. They still are doing the job but their time is short.

Just for math simplicity sake lets assume that the house needs $15,000 in Capitol improvements. New rood, AC, hot water heater, etc.

I'm just trying to wrap my mind around the impact these Capitol improvements affect the deal analysis.

Once they are performed there would have a negative cash flow for that year. But from that point forward maintenance cost would go down for the next 20 years.

[Jon Holdman]

Remember the 50% number is a long term average. It includes capital. In your example, you would have a big chunk of capital over a short period of time. That's similar to doing a rehab to get the place ready to rent. Then, your expenses will be somewhat less for a while. But eventually all those systems get replaced yet again. And even being new doesn't eliminate maintenance. I did a complete rehab on my first rental in 2008, including a new furnace, a gut rehab on the kitchen, carpet throughout the house, plumbing replacement and a new water heater. Since then I've spent several hundred on servicing the furnace, I've replaced all the carpet with laminate, replaced the kitchen floor with tile, repainted much of the place multiple times, and done no small amount of other minor maintenance.