Foregoing the BRRRR Method to Purchase a Property At or Over ARV.

[Alexa K.]

Bottom line is I'm trying to see if this is a horrible idea, or perhaps I'm overthinking things. I live and invest primarily in the rust belt.

I have a rental that is currently being rehabbed. Property across the street recently popped up for sale, and so I immediately put in an offer because (1) close proximity to an existing property, and (2) the numbers made sense. The property is very, very nice and belonged to an elderly gentlemen who kept up the place, but does have two major items that will need addressed in the near future: Roof replacement within the next 5 or so years, and a new AC condenser by Spring 2023. Based on my contractor estimates, I'm roughly looking at around $6.5k The property is already rent ready, save for a couple minor things (new man door on the garage, snake some drains, etc).

I own a handful of properties but am not an expert when it comes to giving information, but here are the numbers I'm working with:

Purchase Price: $55,000
Cash In: $12,000 (15% down payment + minor rent ready repairs + misc.)
Rent: $800-900/month
Expenses: $538/month (PITI + $120 set aside for maintenance, vacancies, etc.)
Net Cash Flow: $262-$362/mo. (26-36% CoC Return)

The cons that I'm hung up on are (1) that the home is certainly not being purchased at 75% ARV or anything like that, but then again the house itself save for the two items I mentioned are in great condition; (2) comps in this particular neighborhood are nearly impossible to place... a few years ago these houses sold for $4,000-7,000 each, but the real estate boom has certainly brought some change. It's a decent neighborhood close to main roads and shops that's been improving year over year, which is nice, however I feel kinda dumb buying such a (previously cheap) house for $55k. Also, (3) Properties around here aren't known to appreciate well... but that's part of living and investing in the rust belt, baby.

The pros that I'm considering are (1) regarding comps, to be fair, others in the area have been purchasing up properties in the neighborhood for anywhere from 50k-65k, many of which aren't as nice as the one in question. (2) I plan on holding onto this property for at least 15+ years, and I don't expect it to necessarily LOSE any appreciation, so appreciation isn't the biggest deal, and I imagine at the very least I should be able to recoup my original investment several times over. It's more likely that it will continue to increase, but I like to assume the absolute worst.

So, with all that said... does this sound like an absolutely asinine deal? Or am I just overthinking things? I'm not used to NOT using the BRRRR method, but I also feel like turning my nose up at a 26-36% CoC Return sounds crazy (although there are those two major items of repair).

Also, I know that $262-$362/mo. in net cash flow might not be a lot to many, especially west coast folks, but to help paint a picture of my current situation: My own monthly expenses are only $750/mo (PITI, utilities, phone/cable), so $262/mo. is almost 1/3 of my monthly living expenses.

EDIT: I updated the numbers because I realized I was using old info.

[Joe Villeneuve]

Re[lace the roof & condenser now, financed at purchase and the roof will be free to you.  If you wait until you have to do it, it will come out of pocket as cash, and thus a cost to you.  If you replace it at purchase, financed with the purchase, it will only add $43/month to your mortgage payment, which comes out of the rent, meaning your tenant is paying for it.  So, 60 payments with an added $43/payment < $2500...which is all the roof would reduce your cumulative CF...not $6500 out of pocket.  Big difference, in both dollars and impact.

If you were to sell it in 5 years, and at the time of sale you could say "new roof and condenser within the last 5 years", do you think you could sell the property for more than $2500?  That means it's a free roof.