Acquiring a fixer-upper to use as a Memorial rental property can seem like an attractive option to many investors. The less you pay for a property upfront, the more likely it is to produce higher results when you sell it or rent it out. However, fixer-uppers also have potential downsides, some of which can turn that bargain property into a financial nightmare. Before you invest in a fixer-upper, it is important to ascertain whether buying one is worth it. Evaluate both the potential risks and benefits so you can easily decide if purchasing a fixer-upper to use as a rental property is the right option for you.
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 these things add up to the highest possible return on your investment.
The Cons
Buying a fixer-upper property may have potential benefits, but there are a few drawbacks as well. For example, it can be hard to assess just how much work you have to do on a fixer-upper property before it is ready for a tenant. Even a professional inspection, which is helpful, cannot always identify serious hidden problems with plumbing and electrical systems, the foundation, or other structural elements. Aside from hidden costs, fixer-uppers also tend to get mired in delays as you have the necessary work done. It can make it hard for your contractor to stick to an efficient timeline. If you plan to undertake all or some of the work yourself, you have to be honest and realistic about the duration of your planned renovations as well as how much time you can commit to the project. The longer your repairs take, the more potential rental income you forfeit.
Is It Worth It?
The only person who can answer 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.
Research and locate comparable properties within the area to determine what your property’s market value will be after all repairs have been completed. Then, 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. Most investors allocate an extra 10% to 20% to cover any unexpected expenses. Total all your costs and subtract them from the estimated market value of your rental 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.
Each scenario is different, so it is really up to each investor to make the decision to buy a fixer-upper or not. But you do not have to make that decision alone. Real Property Management West has expert Memorial 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 832-532-9800 today!
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