Real Estate Investing – Roofs and What They Mean to You

Typically when we think about The Year of something, we think of Chinese calendar years.  They refer to animals such as the Year of the Monkey or the Year of the Tiger.  In this case the Year of the Roof has nothing to do with Chinese calendars.  However, it could be the beginning of a new and shocking reality in real estate investing, especially for rehabbers.

Earlier today I got a call from a very successful rehabber who was lamenting something we had never seen.  It seems the investor had sold one of his rehabbed properties.  The inspection had been completed.  He was headed to the closing. On the way to the closing a not-so-funny thing happened. The insurance carrier for the homeowner’s policy called.  They asked for the “age” of the roof to be verified.  It seems they didn’t want the inspector’s estimate of remaining life.

The age of the roof can be verified by the contract with the roofer.  More accurately it is done with a closed out permit with the city.  However, some cities don’t keep records past a specific number of years.  So let’s say that 10 years ago a roofer installed a shingle roof with a 25 year life.  Logically this should mean the roof has about 15 years remaining as a useful life.  But this is not the case because the roof’s guaranteed life is subject to a depreciated replacement credit as the roof ages.

The insurance company in this case had decided that roofs are a substantial source of their claims.  Not claims for the roof itself, but for damage to contents when the roof fails (leaks).  However, an insurance company inspector will typically give the homeowner a credit to repair his roof instead of replacing it.  The insurance company mentioned above had taken a different tact.  I suspect that it has to do with the average amount of time homeowners stay in their property.  Currently it is about 5 to 7 years nationally.

If the insurance company accepts a roof with 10 years of remaining life, this life span is usually an estimate by an independent contractor.  And it is not a contractor chosen by the insurance company.  History has told the insurers that their probability of water damage to the home’s content is very high after 3 – 5 years.  These claims average over $15,000.  It can be much higher if structural damage results.

The average rehabber faces a huge expense if he has to replace the existing roof on his rehab project.  In fact, the roof replacement is usually the largest single cost in a rehab.  In the past, it was very simple to just overlook this potential problem or patch minor leaks.  What if an insurance carrier won’t insure the property unless it has a new roof?  Many rehabs start out with a budget.  Hopefully their expenses stay within the forecasted limits resulting in a profit for a rehabber.  But if permits have to be pulled for a new roof, the extended rehab time can double or even triple total completion time.  As a result, there is an increase in carrying costs.

In summary, if you are rehabbing a property, you should take into account the possibility of having to replace the roof.  Do this even if it looks good and there are no leaks.  As a distant second option, see if you can get a licensed roofing contractor or engineer to specifically “attest” to the remaining years of the roof’s life expectancy.

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder

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