Should I buy this property that needs a new roof and HVAC?

[Timothy Mitchell]

Hello,

The seller has accepted my offer of $121,200 for a 3 bed/2 bath townhouse. I initially analyzed with the following information and the property yielded a ~$420/mo cash flow and a ~15.7% cash on cash return:

Purchase price: $121,200

Closing cost: $7,800

Loan: I am putting 20% down for a 30 year loan at 3.625%

Estimated Rent: $1,400

Property tax: $135/mo

Insurance: $54/mo

(Assuming 5% Vacancy, Repairs/Maintenance, Capital Expenditures and 10% for a Property Manager)

At first, this property seemed good on paper until the inspector said that the AC, furnace, water heater, and roof are at the end of their life and will need to be replaced in the near term. I obtained an estimate to replace all of the previous items and it will cost roughly $18,000. I signed the contract for buying the property as-is so I don't think the seller will pay for any of these so I am wondering if I should continue to proceed with this purchase.

Paying an additional $18,000 will maintain a ~$420/mo cash flow but will reduce my cash on cash return to ~10%. However, this should also reduce the amount money I set aside for Capital Expenditures since everything should be brand new (which in turn, would increase my cash on cash return but I didn't account for this to keep the analysis conservative).

Please let me know if I should buy this as my first investment property.

Thank you

[Matthew Paul]

@Timothy Mitchell  You said 

"inspector said that the AC, furnace, water heater, and roof are at the end of their life "

Just remember inspectors dont know much about furnaces , AC units , water heaters other than looking to see what year they were made . My hot water heater in my house is 25 years old , when it breaks , I will replace it , Furnace and AC are about the same .I will deal with it when it happens . The inspector guessed at the roof , It could be good for 5 or 10 more years .

In the mean time if everything is working and you have it rented , you are making some cash flow . Not everything will go at once . ( Unless the gods hate you ) 

EVERY house you will look at , things will have to be replaced at 1 point in time . And maybe a second or third time . You may spend 2 grand this year , 4 grand the next , and nothing at all the next 2 years . 

I just spent $31,000 on roofs . It was painful , but I knew it was time . I just put away for that expense over 10 years . But in those same 10 years I was collecting rent .

Dont over think your numbers . Have reserves .