Will new water heater boost ARV

Question

My Wife and I bought a rental property with the intent to use the BRRRR method. We have completed the buy, rehab, and rent portion. We are in the seasoning period to do a cash out refi. The property has an electric water heater. The tank might be a little old but it is in good condition. The house is having trouble getting hot water so it seems The element no longer works. I am debating to replace just the element of the whole thing. I know that if I replace the whole thing I will save on labor in the long term, but as a BRRRR investor will it also raise my ARV when it comes time to get the appraisal?

Salvatore Lentini · Answer

@Jake Silverman - couple things... If you were doing a flip I would say replace it because the inspector would note that it's old and the buyer would end up complaining because in today's age buyers expect the world. But if you're keeping it as a rental, I'd be surprised if it affected your appraisal at all (although it wouldn't be the 1st time an appraiser did something surprising). But, even if the appraiser decided to take money off, it wouldn't be more than what a replacement would cost so it's really six of one or half dozen of the other. You'd be paying either way. Paying to replace it or paying for it with a reduced appraisal. The real question is, who pays the electric bill? New water heaters are more efficient. If you're footing the bill, you'll save money each month and money and time on repairs moving forward. If they're footing the bill, the more likely they will be able to afford rent, the more content they will be because their water heats up quickly and lasts for more than one shower, and they likely won't have to call you with maintenance issues for 7 years. There's no right answer on this one. Because you're also just playing the odds here. You could replace the element and it could last 4 more years without an issue, or you could replace it and find out the control board is bad like @John Underwood said and now you're out more money. The question of repair or replace is always a tricky one. In the past it always made sense to repair. But things like water heaters, appliances and just many building materials in general are made so poorly now, efficiencies keep improving, regulations keep changing, and prices on these things have come down so that the repair or replace question is now a toss up. Horrible for the environment but a reality for real estate investors.

John Teachout · Answer

If it's just a heating element that's gone bad, that's a simple fix. They can be checked with an ohm meter and replacements are pretty available. I'd fix it. A water heater may last five years or 25 years. I change them when they fail. If it's a 40 gallon electric, a new one around here is about $400. Installation costs vary of course. A heater element is about $40 or so.

John Underwood · Answer

I believe you just need to have a working water heater that is of a reasonable age. This is not going to move the needle on the ARV, but an inspector could say that the water heater should be replaced due to age.I would say that if it is over 7 years old just replace it.You could go to replace the element and then find out the control board is bad.There should be 2 elements and as long as one is working you should have some warm to hot water that just can't be reheated quickly when used.

Jake Silverman · Answer

@Paul Shannon hi Paul thanks for the reply. Our property is actually in south bend Indiana.

John Teachout · Answer

Based on that age, replace it with new. I didn't think it was that old when I suggested fixing it.

Jake Silverman · Answer

Thank you everyone for your replies I really appreciate it. The maintenance person said only the thermostat needed to be fixed on the water heater. The tank itself has not rusted at all and looks to be in good condition. However the maintenance person did confirm the tank was 17 years old. My property manager said it would cost $75 for labor and $20 material to replace the thermostat. She also said it cost $150 for labor to replace the whole tank. I’m leaning on replacing the whole tank because it’s near the end of its life. It’s for a small single family house that has 2 bedrooms and 1 bathroom. Is there any reason I should just try and replace the thermostat and wait for the water heater to go bad?

Michael Noto · Answer

It will not raise your ARV at all. As long as the water heaters work properly and aren't visibly leaking they will be viewed the same. Outside of an FHA appraisal I have never witnessed an appraiser even test the hot water works. They just eyeball the heaters for condition.

Ian Walsh · Answer

It depends on the comps. If the comps have one at the price you are targeting, that would be your answer.

Max T. · Answer

@Jake SilvermanAppraisers don’t test appliances, so no. But you should fix the water heater so it works properly.

Chad Carrodus · Answer

I wouldn't replace it. Spend the money on cosmetic upgrades that people can visualize. Or even staging.