The Pros
Why is buying a fixer-upper property attractive to rental property investors? Because of instant equity. Since fixer-uppers tend to be sold at lower prices than houses in better condition, they quickly increase in value even with just a few repairs and updates. A lower purchase price will also mean a lower mortgage payment, meaning you get a higher net profit each month. You may also save on property taxes in the beginning since your first year or so of taxes are likely to be based on the property’s value when you bought it. All of these add up to the highest possible return on your investment.
The Cons
In contrast to these benefits, there are also a few drawbacks to buying a fixer-upper property. For one, it is not easy to assess how much actual work a fixer-upper property will need before it is ready for a tenant. Professional inspections, though helpful, may not always uncover serious hidden problems with plumbing and electrical systems, the foundation, or other structural elements. Along with hidden costs, a fixer-upper can also be met with many delays as you work on the property. This could make it harder for your contractor to stick to an efficient timeline. If you are doing some or all of the work yourself, it is best, to be honest about how much time you can commit to your planned renovations and the entire project. Longer repair works mean forfeiture of more potential rental income.
Is It Worth It?
The only one who can determine if buying a fixer-upper is worth it or not is you. Every rental property owner is different, as is every property. To help assess a particular situation and decide if a fixer-upper property is a good fit for your skills and goals, it’s important to conduct a thorough cost analysis based on the best information you can gather.
Once you have researched several comparable properties in the area, you can then determine the property’s possible market value after the repairs are complete. Don’t forget to add up the total costs of buying and renovating the property. Be sure to include every expense, including closing and carrying costs (mortgage, insurance, utilities, and so on), as well as the cost of materials and labor for all planned repairs. It is also good to add an extra 10% to 20% for unexpected expenses. You can then subtract the total costs from the estimated market value of the house. If your expected return is around 10% or higher, you might just have found a great bargain.
A fixer-upper, though, is not always the right choice. For some investors, buying turn-key properties can be a more efficient but just as effective way to increase your monthly investment income. This is especially true if the property you want to buy is in a higher-end neighborhood, is undervalued by the owner, or has other amenities that make it ideal for a rental property. If you’d rather avoid the hassle of construction, delays in leasing, and the costs of preparing a property for a tenant, then perhaps a fixer-upper property isn’t the right choice for you.
As each situation is different, each investor must decide whether or not to buy a fixer-upper himself. But that does not mean you have to make that decision all by yourself. Real Property Management Freedom has expert Apollo Beach property managers to assist investors like you in preparing market analysis, setting rental rates, and locating potential properties for sale. Would you like to learn more about what we have to offer? Contact us online or call at 813-867-2667 today!