Buying fixer-uppers can seem like a good option to many investors who want a Leland rental property. It is not surprising as the less you pay for a property upfront, the more likely it is to produce higher returns once you sell it or rent it out. However, fixer-upper properties have potential downsides, too, even some that can turn a bargain property into a financial nightmare. Before making a decision, you should carefully consider if investing in a fixer-upper 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
Why is buying a fixer-upper property attractive to rental property investors? Because of instant equity. Since fixer-uppers usually sell at a lower price than other properties in good condition, they often increase in value quickly with 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
Alongside these benefits are also a few drawbacks to buying a fixer-upper property. 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. Having a professional inspection can help but may not always catch serious hidden problems with plumbing and electrical systems, the foundation, or other structural elements. Aside from hidden costs, delays due to necessary works are also a problem with fixer-uppers. It can make it hard 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, you should gather as much information as you can and conduct a thorough cost analysis.
Your property’s market value after all repairs are complete can be determined by researching several comparable properties in the area. 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. Add up your total costs and subtract them 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.
Since every situation is unique, the decision to buy a fixer-upper or not is something each individual investor must make. But you don’t have to decide on it alone. Real Property Management Champion has expert Leland 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 910-782-4488 today!
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