How do you account for deferred repairs in your offer price?
When you have a potential property that will need a roof in 5 years and a
new a/c in 10 years, do you use a sinking fund annuity calculation which
would be deducted from the Gross Rents like the other expenses giving you a
lower NOI thus a lower offer price or is it already budgeted for in the 50%
of Gross Rents formula?
TIA
John
when i calculate the holding cost for a rental, I add 15% of the rents into a reserve fund for repairs. If I know a roof will need replacing soon, I bring it up in the negotiations to get a lower price. I will still need to cover the major repair, but I have already gotten the funds by loweing the price of the home for that repair. Plus I put funds away each month.
Ex. If I collect $1000 a month rent, I like to put $150 away for emergencies. In 1 yr that is $1800. I live in FL, a new roof cost about $8,000-15,000 depending on type… So in 5-10 yrs I will have enough for the roofas well.
Also roofs do really last 40yrs . Just roofers wont tell you or they be out of business. Just like a car mechanic. Find a top notch contractor to handle all your properties and they wont screw you if you give them enough legitament business. Of course if they screw you once, then fire them.
yrush2000,
Thanks for the info. See if I have this right. If the house is going to need a new roof immediately you just reduce the offer by say 8k.
If the house is going to need a new roof in 3 years your reserve(15%) is 150 a month or 1800 yr so: you take 150x36 months =5400(the amount you will have saved up in 3 years) - 8000= $2600
therefore, you reduce your offer by $2600.
Another question, if I’m using the 2%Rule, does this $2600 come off that max offer?
TIA
John