Buying a fixer-upper for a Homestead rental property can be a good option for many investors. After all, the less you pay for a property upfront, the more likely it is to produce higher returns once you rent or sell it. However, fixer-upper properties have potential downsides, too, even some that can turn a bargain property into a financial nightmare. Before deciding to buy a fixer-upper, you have to really consider if investing in one is worth it. Carefully evaluate the potential risk factors and benefits so you can better decide if purchasing a fixer-upper to use as a rental property is the right choice for you.
The Pros
One thing that attracts rental property investors to buy a fixer-upper property is instant equity. Fixer-uppers typically sell at a lower price than their counterparts that are in a better state and they often increase in value fairly quickly with some repairs and updates. A lower purchase price also means a lower mortgage payment, resulting in 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. Given all these, you could get the highest possible return on your investment.
The Cons
Alongside these benefits 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. 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 having hidden costs, working on a fixer-upper can also mean many delays. Your hired contractor might have difficulty sticking to an efficient timeline. If you are undertaking some or all of the repair work yourself, you should have an honest and realistic timeline for your planned renovations. You should also decide how much time you will commit to the project. Remember that you will be forfeiting more potential rental income the longer the repairs take.
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, you should gather as much information as you can and conduct a thorough cost analysis.
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. 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. 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 is not always the best option. 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 you don’t have to decide on it alone. Real Property Management Dade has expert Homestead 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 305-501-1511 today!
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