Deep Dive: Repairs and Capital Expenditures
Nate Hedrick and David Bright discuss how to determine your repair and capital expense budget for your properties and how these two budget lines can make or break your investment.
Episode Summary
As the typical risk-averse pharmacist, you’d probably like to learn about real estate aspects in detail and get the safety of running those numbers before you feel comfortable diving into real estate investing. With that in mind, Nate and David have just wrapped up a project, and today we’re pausing the interviews to get educated about the math that will make all the difference in your real estate investing ventures. In particular, repair costs and capital expenditure, or CapEx, can be a little tougher to estimate for new investors. Nate and David hone in on these two budget lines that can make or break a property as a good or bad investment and start by giving you three quick tips to help with the estimation process, plus some examples of each. The conversation then covers ways to create and use your sinking fund (keeping in mind inflation) before moving into Nate and David’s top four ways to minimize your CapEx by being intentional when finding your investment. With tons of real-world examples from Nate and David’s experiences and clients they’ve worked with, combined with the actual percentages and some explanatory dollar figures, this episode will help ensure that you’re covered and prepared.
Key Points From This Episode
- A reminder to keep repairs and capital expenditures separate when budgeting.
- Defining the two categories and some example issues of each.
- Some different theories and approaches, and the advantages/disadvantages of each.
- Three quick tips to keep in mind when trying to estimate repairs.
- Some examples of what we’ve done to minimize things that could go wrong.
- How to take into account the age of the property and fixtures.
- Ways to use your sinking fund, plus a reminder to be flexible to include inflation.
- Four market-dependent CapEx points to be intentional about when finding houses.
- The importance of talking to a local expert when evaluating rent prices.
- Some great resources for you, from articles to podcast episodes to a free guide.
Highlights
“Talk with other people that are doing what you’re doing, especially in your area. If you’re looking at a local meetup or a local real estate investor association, they should be able to give you an idea of what typical repair costs run.” — Nate Hedrick [0:08:32]
“Making an emotional and not super well-thought-out decision can really come back to bite you depending on the circumstances.” — David Bright [0:29:11]
Links Mentioned in Today’s Episode
- YFP Real Estate Investing 06: Picking (and Switching) Property Managers
- YFP Real Estate Investing 14: Protecting Your Investments
- YFP Real Estate Investing 35: Making Connections Through Local Real Estate Meetups
- Register for a Your Financial Pharmacist Webinar
- How to Estimate Future CapEx Expenses on a Rental Property by Brandon Turner
- YFP Real Estate Investing
- Find an Investor-Friendly Agent
- YFP Real Estate Investing 18: Tax Strategies for Real Estate Investing
- Download The Pharmacist’s Guide to Real Estate Investing
- Join the YFP Real Estate Investing Facebook Group
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[0:00:00.4] NH: Hello and welcome to the Your Financial Pharmacist Real Estate Investing Podcast, a show all about empowering pharmacists to achieve financial freedom through real estate investing. I’m Nate Hedrick and each week, my co-host David Bright and I explore stories from pharmacists all over the country who are achieving their real estate goals while maintaining a meaningful career in pharmacy. Whether you’re a first-time investor or a seasoned pro, we’re here to provide education and inspiration about the world of real estate.
Please note, this podcast is intended for educational purposes only and should not be considered financial or investment advice.
[INTERVIEW]
[0:00:43.1] NH: Hey David, how’s it going?
[0:00:43.6] DB: Hey, good things, how are you doing, man?
[0:00:45.6] NH: I’m great, I’m doing really well. We just wrapped up a project and you and I were talking through some of the math and thought we could – we actually turned an episode out of this because there’s a lot to talk about on it.
[0:00:55.7] DB: Yeah, we’ve been doing this thing, for those that have missed an episode here and there, one of the things that we try to do in this podcast is both inspiration and education. We bring in guests to do routinely but one of the things we find is we bring in guests as we touch on topics without being able to go real deep.
Every few episodes, we like to kind of take a pause and do a deeper dive into a topic particularly knowing that pharmacists in general, like to know topics pretty deep before they feel comfortable diving in. We wanted to talk about today is a little bit more into the running the numbers that helps you decide, is a property a good long-term rental or not.
Not necessarily overall numbers so they we’re touching that a little bit. We do want to focus a lot in on those repair costs.
[0:01:42.6] NH: Yeah, specifically, the capital expenditures that go along with that. I think for me, when I was looking at my first property and even properties on the road, running numbers is the safety net for me. Being able to do that, looking at those, establishing it like a business, that helps me a lot.
Knowing how to do that well and knowing the ins and outs, that not just plugging into a calculator but knowing why you’re plugging into the calculator, that really helps me and so we want to support that for you guys.
[0:02:09.7] DB: Yeah, I know, for me too, that’s not just, “Is this a good property or not?” but it’s also kind of defense against getting in trouble because if the numbers aren’t right on a long-term rental, at least for me, I don’t really want to be in a situation where I have to feed that rental every month, where the rent doesn’t cover all the expenses from that property and now, I’m covering the expense so that that tenant has a place to live.
I know that there’s some advanced strategies or some people do that, and we could talk about that in another deep dive in another day but I think that there’s a lot of safety around making sure that the rent covers all the expenses of the property and not just the mortgage but the other expenses involved as well.
[0:02:49.1] NH: Yeah, you mentioned the mortgage, there are some numbers that are pretty easy to figure out, right? Mortgage payment you can do, you can run a calculator online, super easy, property taxes, go look them up at the county. Property insurance, talk to your agent, property management fees, talk to a property manager.
Some of those are really easy but where I think a lot of people struggle and when I talk to clients, this is where they tend to kind of break down a bit is, “How do I estimate things like repair cost, how do I estimate capital expenditures? I’ve never done that before and there’s nobody I can call to get that number.”
If you’re looking for some of those other kinds of easy numbers, we’ve broken those down in other episodes like way back in episode six with Aron Howell, he talked a lot about how to break down the property management numbers and why that matters. Brian on episode 14, talked a lot about insurance, so definitely talk a look at that one and then Young, just very recently, Young Park on episode 35 did a great job talking about some overall numbers, specifically related to a burn property but still very translatable to any type of property you might be looking at.
[0:03:45.5] DB: Yeah, like you said, repairs and then capital expenditures can be a little tougher to guess and this has come up on recent webinars that we’ve done, also, we’ve got questions on these as well to figure out how do you estimate that and different books, different resources talk about different things. We can talk about some of the mindset around that but certainly, as you’re looking for property, you’re shopping around, we’ve both run into situations where these two budget lines can really make or break a property from being a good or a bad investment?
[0:04:14.3] NH: Yeah, it’s under for the new personal budget, right, these are those one-time expenses that can get out of control and sink you, honestly and so, being aware of them, knowing what those look like and how to look for them, it’s absolutely critical to a successful investment.
[0:04:29.1] DB: Yeah, Nate. Before we get too far into this, can you give us some definitions here? Can you talk through definitions of repairs and capital expenditures and how those are different, what those two are and why someone should care?
[0:04:40.1] NH: Yeah, absolutely. Do keep in mind, these are different things. I laugh because the very first property I ever ran numbers for, the first couple of times I had my calculator rolling, I did not have a separate line item for repairs and capital expenditures. I just thought, broken stuff that I have to fix and I kind of do that in a one-line item.
I encourage you to separate this out and I think explaining this is really important as to why. Repairs are minor things. These are a rip in the screen door, faucet handle that breaks off, a ceiling fan that you need to replace, things that are a single trip to Home Depot and you can get it fixed, right? Or a single call to a single contractor and it’s a quick and easy fix. These are going to happen more sporadically and you just have to have money set as aid for these things.
They’re going to be $50 one month and then nothing for three months or something like that. Depending on how your lease is written, if these result from either a clear tenant abuse or a hole in the wall for example or a party they throw. You actually might be able to charge the tenant for some of these repairs but in more general wear and tear numbers, it’s something that you’re not going to charge your tenant, these are things that you’re going to be taking on yourself as they wear down and break and you just need to step in and be the one to pay for that.
The converse of that or the other piece is the capital expenditures, these are the big-ticket items, expensive things that happen over somewhat expected basis. Needing a new furnace every 10 to 20 years, needing a new roof every 15 to 25 years. Those are the big-ticket items that you can think of, not something that should be a surprise but something that’s going to be very costly.
Often, these are things that you’re going to see and plan for, right? You’re not just going to say, I hope the roof doesn’t need to ever be replaced like you’re going to look at this and plan for it in advance.
[0:06:22.5] DB: Yeah, it’s kind of unpredictable with repairs but at least, predictably unpredictably, you know that at some point, something’s going to break in the house. Any of us that have owned a house that we live in, we all know that things break over time and that there are also these big expenses.
Even though these feel like a little bit of a foreign concept at times, the house that we live in is often times exactly that also, and so you can extrapolate that just to how someone else is living. A couple of different theories or approaches or mindsets and how to think of this. When it comes to repairs, a lot of folks, just like with a monthly budget, will set aside a fixed amount per month, per property.
Some people do this as a percentage of the gross rent of the property, in order to come to an estimate and I’ve heard anywhere from five to 15%, sometimes a little more, sometimes a little less, depending on who you talk with. Others try for a more standard approach where it’s a dollar figure per property nd so they may say like, a hundred bucks per property, we’re going to set aside for repairs or $50 or something like that.
Both have their advantages and disadvantages. Percentages can work well if it’s like – say it’s a $5,000 per week, six bed vacation rental. That is just a enormous and setting aside $50 is not going to cover the repairs that happen in a vacation rental that is enormous.
Percentages may not be so good in like a $700 a month rent, two bedroom house because if you’re only setting aside 25 bucks or 35 bucks or something because your percentage is pretty low, there’s not a lot of times you can even get someone to go out to property and key in for 25 bucks.
Particularly if you’re hiring out a lot of that repair work, which again, a lot of the mindset of a pharmacist investor is, we’re not the handiest of people, we’re oftentimes working, busy in a pharmacy and we need someone to go do that. It is important to make sure that you’ve set aside a healthy enough amount for those repairs to take place.
[0:08:27.1] NH: We’ve really got three quick tips to kind of keep in mind when thinking about estimating those repairs. The first one I’ll cover is talk with other people that are doing what you’re doing, especially in your area. If you’re looking at a local meetup or a local real estate investor association, they should be able to give you an idea of what typical repair cost run.
Age of homes in your area is particularly long, right? If you’ve got older homes, the repair cost might be higher than in other area. Looking at things locally can be really beneficial. If you’re looking for a quick number, a local property manager might actually be able to help you with that as well. The typical expenses for that style of property are going to be X for this area.
Those are the ways that you can kind of quickly estimate those using some local knowledge from others that are already doing this.
[0:09:11.8] DB: I think another strategy that you can do, depending on the property type, is you can try to minimize the number of things that can go wrong. For instance, if we come across a house that we’re remodeling and it’s got one of these 80s gigantic ceiling fans that you turn it on and it wobbles and all that stuff, you know leaving something like that is just a recipe for, there’s going to be a repair coming up soon.
We tend to remove those and just put up a very simple $10 dome light and we put LED bulbs in that so that hopefully, there’s not a ceiling fan that breaks, it’s a kind of bullet proof light, the LED bulbs aren’t going to go out so someone doesn’t remove the dome and lose the dome before they put it back while they’re changing lightbulbs and things like that.
We just try to make sure that that’s an inexpensive fixture that’s hopefully got less chance of breaking than whatever is there. Certainly, in a more expensive vacation rental or something, you might want a really nice ceiling fan and that may be appropriate, a lot of this is going to be purpose dependent and property dependent and price point dependent. As you’re looking through all those things, trying to think through, how can I minimize the number of things that will go wrong with this property?
I know one of the thing, Nate, that you and I both do is going through and tearing out carpet and putting in vinyl plank flooring, something that’s got a 25 year warranty and stuff like that, versus a carpet that needs cleaned all the time or gets torn and ripped and replaced much more frequently. Again, trying to minimize the number of things that can go wrong.
[0:10:45.4] NH: Definitely important. And that third tip we have for this one was, estimate conservatively, especially in your first year. This is something that I learned early on was that come up with a number, stick with it, set that money aside and then evaluate it over time, right? If you get that property and it turns out, “You know what? This one’s just going to have more repairs on average until I get things up to a certain level” you may need to adjust that number but start conservatively. It’s always better to pad those reserves a little bit upfront and then as you work through a year or two of that property, you can start to figure out, “Okay, what’s the actual repair for this typical property?” and then you can go from there. Start conservative, work from there.
[0:11:22.6] DB: Yeah, there’s definitely other things that can factor into that, particularly when we talk about repairs. One of the things that in my market, there’s a lot of rentals that were last remodeled in the 80s or 90s and they work, they’re generally safe, they’re generally decent but if I’m going to buy a property like that, I have to expect that a lot of those things have a much shorter lifespan than if that property was remodeled in the last year.
Which is one of the reasons why just for our style, we like getting properties that are a little beat up so that we don’t’ feel bad about removing those things, fixing it, having contractors that we trust to fix it right from the get-go and then we know that there’s less of a risk of repairs because we’re not counting on 30-year-old faucet, 30-year-old light fixtures, 30-year-old whatever, to still work.
[0:12:11.0] NH: It’s super important and I seen clients go through this actually. We had a house this past year or client this past year that was like, a couple of homes. One of the ones that came up was one that had everything had been recently remodeled and the price point was pretty similar to some of the other properties that we’re looking at but everything had been recently remodeled. Everything had been tuned up and it had been made tenant proof, it was bullet proof repairs, right? It had been setup for that where things are not going to break down as often.
We could look at it and it actually helped the cashflow numbers quite a bit because you could put in lower estimates for your typical monthly cost on repairs because it had already been done. That can actually help to really adjust your evaluations when you’re looking at properties is looking at okay, based on the current finish level of this, if I do nothing, are my repair cost going to be exorbitant or are they already taken care off because this has been recently fixed up. Definitely important to look at as you’re evaluating properties down the line.
[0:13:06.4] DB: Yeah, absolutely. I think that those repair kind of concepts also fade into the discussion of capital expenditures or CapEx, and so let’s dive into that one for a little bit. Remember, what Nate just described, it’s easily the expensive things that are generally somewhat predictable like furnaces and roofs, you may still get a call and we got one a couple of weeks ago that yup, the furnace is dead so it’s still a little bit of a surprise in the moment but it was also a 25-year-old furnace.
We knew that that wasn’t going to last that much longer and we needed to be prepared. We were prepared, it was fine, those things do happen, just like in your own home that you own. Again, the expensive things like furnaces and roofs and so the concept of a sinking fund is something that a lot of pharmacists apply in their own budget. This is where, say for instance, you want to save up $10,000 over the course of five years to buy a car so you could set aside $2,000 a year to eventually reach that goal.
You could do the same kind of thing with a house, let’s say that a furnace costs $2,700 because I just bought a $2,700 furnace. Let’s say that I’m expecting that to last 15 years or 180 months, if I do the math on that, that’s right around $15 a month. I don’t necessarily need a $15 month sinking fund for a furnace and then $18 a month fund for a roof.
Whatever that would be, whatever those numbers have come out to be but you can instead come up with a combination amount where you think about roof, cabinets, flooring, windows. Whatever other things that you think are going to need to be replaced over time and you can come up with a combined number to do that. Bigger pockets has an article that we’ll link in here, it’s really well-thought out that talks about those.
If you want to be a very detail-oriented pharmacist and you just get excited about a really cool looking excel spreadsheet, that’s a great one to check out, there’s no need to reinvent the wheel so yeah, that one’s out there but that’s kind of the concept of making sure that you are setting aside numbers for these expenses.
[0:15:21.6] NH: The one thing that that article – I really like about that article too is that it highlights that this is not a perfect system either, right? You’re assuming, not everything is new on day one and old on day 180, right? Looking at things with the idea that hey, this might be a more accelerated approach for certain problems.
I’ll tell you, I think we’ve told this story before on the podcast but one of the first properties I bought – I knew it needed a roof replaced within the next five years, like it was going to happen, it was part of the expenses, we worked into that and so, that sinking fund hit was pretty accelerated for us, we said “Look, we really need to put aside extra money every month and we know it’s going to go towards the roof.”
The good news about that property is that we actually had the boiler replaced right when we moved in. It was part of our negotiations. We knew, that was going to be taken care of, we could wait on that and so, we almost built the sinking fund that was going to be, okay, roof first, then after when that’s done and we just had that replaced, and we almost covered it with our sinking fund but roof first. And then now we can start saving up for a new boiler 10 years from now or whatever needs to be taken place.
You can step wise these things as well, it doesn’t have to be all at once. The other thing to keep in mind too is that when you’re creating those sinking funds and starting to look at how much am I going to need to save, don’t forget about the risk of inflation, right? The cost of a roof today is not going to be the cost of roof in 20 years from now.
It can’t just be, “I talked to a guy, he said it would be $10,000 to replace the roof so I’m just going to put $10,000 in the account and it would be good.” It could be $15,000 by the time you need it, right? Keep that in mind, this is not a such a hard and fast target, you need to be flexible with this as time moves forward.
[0:16:55.9] DB: Yeah, absolutely. Then, like you mentioned earlier, aside from setting aside money, which is certainly important to do so that when these things happen, not if, but when these things happen, you are prepared. Then there’s also a lot of intentionality into finding houses. And so I think it’s one of the things that we should talk about and we’ve got four points laid out.
The first one is minimizing the capital expenses, the capital expenditure expenses whenever they come up. For instance, in my market a three-bedroom house will rent for roughly the same monthly rent whether it’s a thousand square foot or a 1,600 square foot house. The square footage of the property matters a lot less than just the bedroom count.
Again, my market could be very different from your market so don’t – this is very market dependent but I really like those thousand square foot houses because when we have to go and replace flooring and we have to repaint it between tenants, it is so much more expensive to replace flooring in a 1,600 square foot house than a thousand square foot house, and to repaint a 1,600 square foot house than a thousand square foot house.
And a 1,600 square foot house is going to have more windows and all those kind of issues, a bigger roof, those kind of things. I specifically look for smaller houses when I’m shopping and the last two rentals that we bought was like an 1,100 square foot and a 950 square foot three-bedroom house because we just really love that size. We found that that is a fit in our market.
[0:18:31.7] NH: That’s funny, it’s totally different from a typical flipping mindset or from, you know, even if you’re looking at a simple appraisal, right? They’re usually going based on that square foot number when you are talking about comps, “This is what we’re taught in real estate school, this is what appraisers think like.” If it is a 1,200 square foot place, I can look at other 11 to 1,300 square foot properties.
I can’t look outside that and so it definitely helps for minimizing the CapEx and looking at those big expenses but it can harm your appraisal, so keep that in the back of your head as well.
[0:19:00.7] DB: Yeah and again, because this is all very market dependent, I like that it comes out with a lower peso because then I am buying a cheaper house that still rents really well versus having to buy a much more expensive house that appraises higher to only get the same amount of rent but in a market dependent situation, that may not work. I’m sure that there are some markets where, say you add a basement unit by converting an unfinished basement to a one bedroom or a studio unit and you could rent out that basement for a thousand bucks a month.
Well, that may be a huge win to create square footage, which drives up your appraisal and gives you value there. It drives up the rent and it’s not going to affect the roof or the siding or anything because it was a basement that was already there, which you had to take care of anyway. In my market, that doesn’t work but in other markets, it certainly could and so again, just because something works in an example that we’re throwing out there, doesn’t mean it works everywhere. You’ve got to talk with local experts and have a good local realtor that can guide you through some of that.
[0:20:03.3] NH: That is really a good point David. I think everything we’ve just been talking about seems a little overwhelming, right? How do I know if a 1,600 and 11 and a 1,000 square foot house is going to rent the same? That’s when you need a local expert, right? That is either going to be a good real estate agent, probably a good property manager. Those people are going to be the ones that can actually help with those tools and evaluation.
I guess a brief reminder, if you are looking for a good real estate agent in your market and good property managers to go along with that, please head over to yfprealestate.com, you can tap into our concierge service. We can get you connected to somebody who is an expert, who is investor friendly so that you can get this information. I mean, we talked about this a couple of times but that local knowledge is absolutely essential.
Having the right person on your team can make all the difference. I definitely encourage you to check that out, it’s a free service that we offer to get you connected with those agents and again, it can be a really great way to get rolling.
[0:20:54.6] DB: Yeah and I found that having a local expert in that specific market even in that neighborhood, in that city can be just so helpful. I’ve even – and I would encourage you too, as you’re walking properties making through these, when we’re thinking through, “How would this work as a rental?’ I’ll even ask my agent questions, like “How could we put a really simple kitchen in here so we’re not dealing with custom cabinets and things that are really expensive? What would be the simple approach?” Or asking the property manager, “Do you recommend not having a dishwasher or having a dishwasher?”
You know, those kind of things can really help you to gauge what do you need to be kind of normal in that market to compete well without having to go overboard on your refinishes and then your capital expenditures.
[0:21:44.5] NH: Yeah. All right, then the other thing you can do to – our second point about what you can do to manage those capital expenditures is you can look for a recently renovated house. We talked about this with the repairs, it’s the same idea. A house with a new roof, a house with new flooring throughout, a new HVAC system, a new kitchen, any of that stuff can really start to minimize the overall capital expenditures you’re going to incur.
Getting that done ahead of time that can be really helpful in terms of not having those costs come along in three or four or five years but worrying about them from 20 years from now, which is really nice.
[0:22:17.4] DB: Yeah, one thing that can come into play there is if you do buy a totally turnkey house, the one potential downside is that all those things may then break all at the same time. You know, if you have a 20-year roof and a 20-year furnace, those things all may be kind of a ticking time bomb, so there are people that will buy recently renovated house, rent it out for 10 years and then sell it before a lot of those things come up and so that’s one strategy.
Or if nothing else, not thinking like, “Oh, I don’t really need to save anything at all because it’s a new house” and being in that mindset for 19 and a half years right before everything starts to implode. Just being conscious of kind of those dates, Nate, you talked about it with kind of the staggered repairs that can happen versus repairs that may come all at once.
[0:23:02.5] NH: Yeah and again, this come up from time to time with clients that I work with who are looking at need to renovate houses and say, “Man, it is $60,000 more than anything else, I don’t know if I want to pay for that now.” But if you run the numbers and you adjust your capital expenditures and you’re in it for the long game, which again, we’re really talking about long-term buy and holds in this case, it can actually be to your benefit to have that more finished house.
I have seen clients where they actually went out because the stress isn’t there, the potential for a problem to occur isn’t there because it’s all been done. It’s still under manufacture warranty and guaranteed for X amount of years. I mean, there is a lot of peace of mind that comes with that.
[0:23:39.3] DB: Yeah, so again, the first point we have is minimizing the CapEx. The second strategy we had there is looking for recently renovated house. The third strategy is kind of the opposite of the second one, if looking for a recently renovated house isn’t quite an option, another option is to look for a house that just straight up needs everything. And I know Nate, the last one that you bought was that situation, right?
Where you needed a roof, you needed a furnace, you needed flooring and so one of the things that’s nice about that, we’ve had that situation come up too. One of the things that I really like personally about that is when I know the contractors that put that stuff in and I can trust those contractors, and I have a say in picking out some of these finishes to make sure it is vinyl plank flooring that’s pretty bulletproof and we’ve handled all of that, then I can also trust it a lot more.
Again, that’s probably just an overly conservative pharmacist viewpoint, right? Of trusting what someone else did that you bought it from versus being able to know that happened to yourself. But there is a lot of peace of mind that comes with having all those things done by people you know and trust so that you can feel confident that that is a safe and respectable rental moving forward.
[0:24:52.7] NH: Yeah, obviously the downside of this is the cash up front, right? That is the biggest problem is that you have to spend a lot more on this. It is difficult to finance repairs. You can absolutely do it but it is more tricky and you might not be able to get a conventional mortgage if the house comes in that bad of a shape to begin with. A lot of times, a house has to be livable for a conventional mortgage to apply.
If doesn’t have HVAC or the flooring is falling through or the roof is leaking in a way that is unsafe, a conventional mortgage might not even apply. We typically buy those houses in cash but it can be one of the downsides, is that you’re tying up a lot of cash until you can get the refinance stuff on those.
[0:25:30.6] DB: Yes, so kind of the opposite of the recently renovated house is super simple. You get a mortgage, you don’t have to hire a contractor, you don’t have to do hardly anything, you buy it, you put a tenant in it and you forget about it. This is a strategy in it of itself to buy a house that needs everything to find the contractors, to manage that process.
The other potential upside is that, if done well, if you’ve bought the house right, if you found the right contractors and manage them well, you can sometimes create some forced depreciation, where the house is worth more at the end of the project than the sum of the acquisition, the repair cost. It’s kind of the heart of the BRRRR strategy that we’ve talked about in several different episodes now and we can do a deep dive on another day. But there is a whole strategy behind looking for those houses that are just really beat up and need a lot of love as one way just investing in general but also to minimize the CapEx.
[0:26:25.2] NH: Yeah and the fourth way that we thought about to really minimize the impact of CapEx and again, I am going to get flack for this because it feels like a realtor talking, right? Is just to sell the property, right? You get to the point where you already owned it, everything is going to the point where like, “I know this stuff is going to go pretty soon, I don’t want to be the one that has to deal with this.” You can sell it.
I’ve seen many people do this. In fact, that is how we get a lot of our properties because there are people that don’t want to deal with the capital expenditures that are about to come due and instead of dealing with it themselves, they pass it off to me and I’ll deal with it. And we go back to what we just talked about in strategy number three where we’re the ones putting everything into place. It can be an option, obviously there are a lot of factors to consider but it’s definitely one way to manage those capital expenditures.
[0:27:08.5] DB: Yeah and I think if you wait too long there is a little bit of a risk there of selling that property and not doing very well in the sale because it’s clear that you haven’t kept up on those things. If you wait until the roof is leaking and there is a puddle in the living room, now you have a problem, right?
That is going to be a hard house to sell but there is a strategy of, like we talked about a minute ago, buying a property, immediately putting that new roof, furnace, kitchen, bath, flooring, paint, all those things and then within that first five, ten years before really anything starts breaking and going wrong or even really appears to be old, selling it at that point.
There’s sometimes that sweet spot where a buyer is going to walk in and say, “Well, this is all pretty new and it’s not really going to impact the sale.” Certainly not like a swimming pool in the living room kind of thing, and so sometimes, that sweet spot can work where you haven’t had to reinvest a lot in the capital expenditures.
You’ve gotten to create an opportunity for a tenant to enjoy all of that and then create an opportunity for a buyer to enjoy it and then continue to keep it up overtime.
[0:28:11.7] NH: Don’t forget, when you’re considering selling, if you do get to that point, you know there is a cost to doing so. Obviously, those realtor fees, even if you do something for sale by owner for example or you’re a real estate agent yourself, there are still costs associated with selling. Even tax, especially if it’s been an investment property for you and you are paying capital gains on something.
There are a number of factors to consider, it’s not something you want to do without your CPA involved, there are financial planner, even your property manager but there’s a lot of options if you’re worried about capital expenditures and this is kind of the route that you’re going, just keep that in mind.
[0:28:44.8] DB: Yeah and that is probably another plug back to episode 18, when we had Amanda and Matt on talking about tax strategies. Any time you’re thinking about selling a house, that’s a big deal with all kinds of tax implications there, so definitely a great time to talk with professionals and make sure that you’re making the right call and you’re not just like, “Oh, I don’t want to pay $9,000 for a roof. I am just done with this place and I am selling it.” Making an emotional and not super well-thought out decision like that can really come back to bite you depending on the circumstances.
So, great time to phone a friend and make sure that that’s the right call. Again, there’s definitely not a one-size-fits-all plan for any of this but one of the things we just want to emphasize is that being overly optimistic that your roof is going to last 50 years or that your furnace is never going to go out, or that repairs just won’t happen or that if I set aside $10 a month, that’s going to cover all the repairs for sure, like those kind of overly optimistic predictions, are just a recipe for problems and just a frustrating investments.
So understanding these costs and, like you said earlier Nate, not just numbers that you plug in a spreadsheet but understanding what a repair is and what a capital expenditure is, understanding those costs can help you make a strong decision moving forward.
[0:30:06.8] NH: Super important that you don’t ignore this stuff. I mean, I’ve talked to so many people and seen so many posts online of people that say, “I bought this property and it cash flows $900 a month” but they are not factoring in repairs and capital expenditures anywhere in that. And what’s going to happen is they’re going to collect $900 a month and they’re going to put that in their pocket.
They’re going to go spend that on something else, then they’re going to have a $10,000 roof repair that comes up and they’re going to have no money for it and they’re going to say, “Well, it was cash flowing great and that totally wipes up all that cash flow for however long.” Realize that these numbers are important, factor it in upfront so that you don’t fool yourself into thinking a property is doing better than it actually is because it will come to bite you in the end.
[0:30:49.9] DB: Yes, it’s a big emphasis on, there’s so many people that look at a rental property and they think, “Well, as long as the rent is more than the mortgage I’m safe” and this I think is a – hopefully, we’ve shared enough examples to make it clear that there’s got to be a big chunk in between that rent check and that mortgage check to cover all of these other expenses that come up.
One more thing before we end today is, we’ve definitely talked about both ends of the spectrum in terms of setting aside percentages, setting aside dollar figures. And we’ve talked about, that can be different in different places, how asking local folks like a good property manager, a good realtor that has experience with rental properties what you might do, asking your local market might help especially for that type of investment whether that’s a short term or a long term rental, whatever that looks like, so that’s definitely one place.
We’ve also got the Bigger Pockets article that I would encourage you to read, it’s a great article. If you’re looking for something a little more comprehensive that walks through all the numbers that we talked about as far as the mortgage, the taxes, the insurance, vacancy, management, all those pieces there as well as some suggestions on numbers for capital expenditures and repair costs, head over to yfprealestate.com and download our guide there.
That’s a document that will walk you through all those with suggestions for numbers to kind of help you get started with the deal analysis as you start looking at properties that are out there.
[0:32:17.1] NH: Another great resources David, and I hope this has been helpful to you guys out there. Hopefully, this is a good reminder of what CapEx repair cost can actually look like. Again, that guide can be really helpful in terms of getting actual numbers in front of you. We’d love to connect with you guys more if you are on the YFP Real Estate Investing Facebook group or head on over to yfprealestate.com, you can connect with us.
We’d love to hear more about what you like about the show, what you like to hear more of in the future. If you’d like to be a guest on the show, we’d love to have you or if you just have ideas for future shows on deep dives or whatever you want us to cover. Head there, check it out and connect with us, we’d love to connect with you. Thanks so much for joining us.
[0:32:55.0] DB: Thanks so much.
[END OF INTERVIEW]
[0:32:56.0] ANNOUNCER: Thanks for listening to the YPF Real Estate Investing podcast. If you like what you heard on today’s show, please leave us a review and subscribe to the show so you never miss an episode. If you have a question, know someone that would make a good guest or want to connect with Nate or David, head on over to yfprealestate.com and join the growing YFP Real Estate Investing Facebook group.
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