Buying fixer-uppers and pouring sweat equity into those properties trended almost a decade ago. While there are still plenty of investors who “flip” homes for a profit, buyers are trending toward homes that are move-in ready. As this trend continues, the classic fixer uppers are staying on the market longer. Because of this, there may be an opportunity for new home buyers and investors to capitalize on these properties. Here are a few things to keep in mind when considering a fixer-upper as an investment.
Purpose of a fixer-upper purchase
Before buying a potential fixer-upper, it is important to consider what type of investment you would like. Are you planning to do a quick flip on the home? Look at properties in popular neighborhoods with renovations requiring only a few months to a year. Are you planning to live in the home for several years before reselling? You can focus on more long-term renovations, keeping in mind that you still want to find a home that is habitable for that time frame. In general, a live-in, long-term project is a lower risk investment than a short-term flip.
Owning a rental property is an excellent way to build wealth over the long term. When you collect rent and use it to pay down the mortgage, your equity increases. Essentially, your tenants are building your equity for you! Over the long term, rental rates increase which also increases your properties income generation and resale value. Although rental properties can be a solid investment, they do present many challenges and certainly are not for everyone. However, purchasing a rental property that needs sweat equity can be a great investment.
Skills vs Types of Renovations
Some fixer-uppers just need a deep cleaning and some light cosmetic changes. Others may require major repairs or updating to the electrical and plumbing (or the dreaded structural issues). Before you start looking, it is good to assess what skills you (or family/partners) have available and what skills you will need to outsource. Keep in mind that the idea behind sweat equity is that you can save the most money doing a project on your own. If a property looks like it is going to need a lot of outsourced repairs, you may want to look elsewhere.
Home inspections are always recommended. To flip a home in a short amount of time, you may be tempted to forgo the home inspection to save time and money. Don’t do it! An inspector can help you find issues that could put you in the red for your project. Even if you are an experienced contractor or renovator, having a second set of eyes can be helpful.
Sweat Equity and Return on Investment
In a previous blog, we discussed return on investment (ROI) as being a key component for deciding on sustainable renovations. Consider the ROI for investment properties, as well. Think about the buyers or renters that you want to attract to your finished property. You can consider adding decks, updating cabinets, removing of wallpaper, etc. ROI also comes into play with your location. Your Real Estate Agent can help you navigate these options.
Personal Taste vs ROI
New renovators sometimes catch themselves in the trap of choosing renovations based on personal taste instead of practicality and necessity. Will tearing down the wall between two bedrooms to create a larger master bedroom have better ROI? You might personally like the extra space, but a potential buyer may prefer more bedrooms. Should you place detailed cabinet doors with a delicate marble counter-top in the renovated kitchen? That might be attractive to you or a potential home buyer but not cost effective in a rental property.
Prepare for the Unexpected
It is important to expect some unforeseen costs or repairs during renovations. There are different types of financing for short-term and long-term projects. In addition, estimating resale value in future real estate markets is more art than science. It is important to do your research, and find a real estate broker who you can trust.
Looking for a “fixer-upper” as a home or investment property? Reach out to the experts at The Real Estate Store to learn more!