The Darwinian Doctor This post discusses the importance of financial reserves in the context of an $18k roof repair at our duplex in Indianapolis.
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This is part of my “Building the Empire” series.
It’s easy to be a bad landlord when it comes to repairs. Instead of replacing old appliances or infrastructure with new, it’s far cheaper to patch, glue, or repair just enough so things are functioning. While this is the most cost effective method, it tends to lead to more complaints and worse tenant satisfaction.
In the long run, I would argue that it’s better to replace items when they reach the end of their useful life. But depending on the appliance or item, this can be an expensive proposition.
Duplex #4
This is the fourth duplex I bought in Indianapolis. It needed a thorough renovation, but turned out great afterwards. Since it hit the rental market, it’s been one of my best performers in terms of income, appreciation, and tenant quality.
Here are the quick numbers behind the duplex:
- Purchase price: $123,000
- Configuration: Duplex, 3 bed/2 bath each side
- Original target total rent: $2600
- Renovation cost: $123,393
- Refinance appraisal: $275,000
- Actual current rent: $2800
- Current estimated value: $400,000 (comps)
After the cash out refinance in 2021, the pure cash on cash return was 18%. But if you consider the pandemic driven appreciation and principal paydown of the loan, the “real return” is much higher.
Read more about duplex #4 here: The real estate empire has grown! Anno Darwinii 1.0
The value of a property is more than just numbers
Obviously this duplex was a great acquisition in terms of numbers. But if you also consider factors like ease of operation, this duplex has been a home run. No pit bulls or car fires here!
No recurrent burst pipes or sewage issues either!
So I feel particularly fond of this property.
I take water issues seriously
As I noted above, water can be a big problem. So when the tenants in duplex #4 noted a slight leak around the chimney, I’m glad that my property manager took it seriously. He got a roofer inspection right away. They localized the leak to this chimney:
There were two conclusions from the roofer.
- The roof shingles are entering the end of their useful life
- The chimneys are falling apart and would be better off removed
After consideration of the above factors, we decided to go ahead with the full replacement of the roof on both the duplex and the garage, plus removal of the chimneys. The cost breakdown for all this was $17k, but it turned out to be $18k due to additional materials needed during the repair.
We certainly could have just patched and put off the full repair/replacement for another season, but we felt this property was worth the investment.
Reserves are important
This brings me back to reserves. $18k is a large sum of money. It’s tough to come up with this much money unless you planned for it.
The more property you have, the more reserves you should have. It doesn’t have to be just cash sitting in your checking account, but you should at least have access to the money via reliable credit like a HELOC.
Without sufficient reserves, bad luck has a higher chance of snowballing into difficult situations where you might be forced into hasty sales of property or just bad tenant service. Either issue puts you (or your tenants) in a bad spot.
Conclusion
In conclusion, make sure that you have access to cash reserves if you’re a real estate investor. How much? I recommend having at least $10k on hand per property if you only have one to three properties, or $5k per property if your portfolio gets above 10 units. I personally start to feel nervous when my real estate reserves dip below $50,000.
–The Darwinian Doctor
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2 comments
I completely agree with you. Repairs must not be put off whether you are a homeowner or a real estate investor. And it is particularly crucial in the case of real estate investors because their reputation is at stake in the market. To have cash reserves at hand is another excellent piece of advice, to be able to pay for the expensive repairs without battling an eyelid.
Your emphasis on the importance of proper maintenance and the value of investing in repairs when needed is spot on. It’s easy to take shortcuts as a landlord to save money in the short term, but as you’ve pointed out, it often leads to more problems and unhappy tenants in the long run. Your example with Duplex #4 illustrates how investing in renovations and addressing issues promptly can pay off not only in terms of property value but also in tenant satisfaction.