Making the numbers work

[Lance Borden]

BP nation,

In my market, turnkey (rent-ready) homes are going for $140K - $150K and renting for around $1 per sf. Now - you can get a distressed property for $110K - $120K, but by the time you fix the foundation and give it the TLC it needs, you're close to the same numbers. Am I aiming too high? Is rent at a rate of 1% of purchase price too low to invest? Originally I had a criteria of paying around $80-100K (all-in) and getting rents of $1300-1500, but I'm having a hard time finding those deals in what is a sellers market.

Any and all advice welcome.

-Lance

[J Scott]

Originally posted by @Lance Borden:

J Scott

By CapEx I'm assuming you mean rehab costs?

Nope...CapEx (Capital Expenditures) are the large repairs that you need to do every once in a while to keep the property in habitable shape, extend it's useful life and/or increase its value. For example, replacing the roof, replacing the HVAC system, replacing a water heater, replacing a kitchen, opening up a floorplan, upgrading the electrical system, etc.

While these expenses are only completed every 5, 10, 20 or more years, they tend to be more expensive, and therefore, the costs should be thought of as amortized over the life of the component.

For example, you might need to replace a roof only every 20 years.  But, if the cost is $5000, that's an average of about $250 per year amortized over that entire 20 years -- or about $20 per month.  The HVAC system also gets replaced about every 20 years, and probably costs about $5000 as well, or about $20 per month amortized over the entire 20 years. 

When you factor in all the CapEx for a particular property, you'll probably spending on average about $50-100 month (though again, you'll spend it in large chunks every once in a long while). It's just like vacancy -- you may say that you're losing about 8% of your revenue to vacancy, but that doesn't mean you lose exactly 8% every month. Instead, this is an average over a long period of time...that's how CapEx should be viewed as well.