5 Questions to Ask Yourself Before Buying a Fixer-Upper Property
A fixer-upper home is one that requires a significant or minor rehabilitation before being used. The repairs of a fixer-upper can mean a light cosmetic touch such as a new carpet or an intensive renovation such as a new roof. Fixer-upper houses can be a goldmine.
However, properties like these are risky and you can lose a lot of money when you invest in them. See their advantages and disadvantages.
Advantages of Purchasing a Fixer-Upper
Less competition: nice homes are in high demand because that is what everyone is looking for. People want a move-in ready house and especially single-family houses. For multi-family properties, investors avoid buying a problem. When you decide to buy a fixer-upper, you eliminate most of the competition and you can easily find a deal, even in a crowded market.
Forced appreciation: this concept can help you build immediate equity. Appreciation is a great generator of wealth in the real estate industry. With a fixer-upper property, you do not have to wait for years for the property to appreciate. After rehabilitation, a house can be worth much more that you bought and renovated it for.
More cash flow: there is the potential of greater cash flow with fixer-upper properties because you buy them for way less than other houses in the neighborhood. You take out a loan on a cheap distressed house but rent it out for its new value.
Unique financing options: most lenders will be hesitant to lend on fixer-upper properties. However, there is something you can do to buy a house without using much of your own money. To do this, look for a great deal and then find a private lender. After the seasoning period, refinance your house to a long-term mortgage.
Disadvantages of Purchasing a Fixer-Upper
Hidden expenses: there are the problems that you can see and then there are others that you will only discover once you start working on the houses. Estimating the exact amount that you will spend on rehabilitation is, therefore, difficult.
Stress: fixing these homes is never an enjoyable process. There is a lot of drama, frustrations and sometimes injuries, if you do the renovation yourself. If you hire a contractor, you should be ready to be disappointed occasionally.
Out-of-pocket-costs: during the process of rehabbing a house, you will have a hard time sticking to your budget. The same goes for your timeline too. You will find yourself spending more money than you thought you would and the project will take longer than you anticipated. Consequently, your ROI will be affected and the deal you thought was a great one may go down the drain.
5 Questions to Ask Before Investing in a Fixer-Upper
Should you even invest in these kinds of properties?
Despite the disadvantages discussed above, fixer-upper properties are still a good investment. Just take a look at the advantages. However, before you put in your money, ask these questions.
How Bad Is the Property?
Fixer-upper properties have different levels of severity. Some will only require a few thousand dollars while others will require a complete overhaul. Obviously, a property that needs little work is less risky. However, remember that if it requires less work, you will face more competition. Experts advise you to find properties that look like they need a lot of work but actually don’t.
A good example is a house that has a bad smell. Most investors will stay away from a house like this despite the fact that it is not hard to get rid of the smell. The same applies to bad roofs and an ugly exterior. Before you purchase a fixer-upper do a thorough evaluation.
Is It Worth It?
A fixer-upper is not automatically a great deal. In some cases, you will be better off buying a finished house. The cost of buying and rehabbing a house should not be more than (or even equal to) the cost of buying a similar finished house. If anything, the cost should be lower—that is what makes it a great deal.
Do You Have the Time?
It does not matter whether you hire someone to do the work or you do it yourself; the project takes time. You will have to drop by the house often to see to it that everything is going smoothly. Other times, you will have to do things on your own. Some projects end up taking years!
Do You Have the Skills?
Most investors interested in fixer-uppers plan to take care of the work themselves. This is highly encouraged, as long as it is on a small scale. You will save a lot of money and when you decide to hire people for future projects, you will be a great manager. However, you need to have the skills.
Do You Have the Drive?
Even if you do not have the skills, having the motivation and desire to learn will help you accomplish the project. You will be able to acquire the necessary skills and become a pro in no time.