Investing in real estate can have a substantial payoff if it’s done right and the market conditions are in your favor. But, if you invest in a fixer upper you could have an even greater chance of the property appreciating. There are a lot of people out there who make significant profits off flipping houses. However, there are many downfalls to buying a fixer upper as well which should be thoroughly considered before making the big purchase.
Renovating a fixer upper is already expensive and timely, but what about the hidden costs that may pop up? Most fixer upper renovations go above budget and exceed the expected completion date. Be prepared for surprise costs that your contractor may run into during the renovation. It’s hard to budget for a fixer upper renovation because you never know what you’ll find once you dig in.
Less Competition & Lower Price
There are more people in the market looking for move-in ready properties or homes with a little bit of work to do compared to people looking for full on fixer uppers. This means that there is less competition and of course since you’re buying a property that needs to be gutted and redone, you save on the purchase price. The low purchase price of fixer uppers contributes to the chance of the property appreciating greatly once it’s redone. But such a low list price can be a sign the home has been neglected for a long time and requires an extreme makeover.
For many people, buying a fixer upper means that not only will they need help financing the purchase price of the property but also renovation costs. Some options for financing both costs are Fannie Mae HomeStyle renovation loan, Freddie Mac renovation mortgage and the Federal Housing Association 203(k) loan. To go with Fannie Mae or Freddie Mac, you’ll have to find a conventional lender who offers these products. There are many restrictions for each of these loans so you’ll have to do your research, but these options are more beneficial than other financing options that may force you to take out multiple loans.
Is there a neighborhood or an area that you would love to live in but the homes are too expensive or few are for sale? You might have better luck looking at a fixer upper in the area and making it into your dream home. There may be limited options of fixer uppers in the area you like so this approach might not always work out. Keep in mind that the property's future value will be better if you buy the eye-sore in a nice neighborhood than if you buy a nice home in a neighborhood full of eye-sores.
If you’re considering a fixer upper to live in and call your home rather than to flip and sell, this will be a long-term project. Besides the planned renovation which can take months to over a year to complete, if you plan to live in the home be prepared for issues to pop up at any time that need to be addressed immediately.
It may look like a new build after your renovation, but it isn’t. This means you’ll have to plan for higher maintenance costs in your budget after the renovation than if you were to buy a home in better condition.
Less Property Taxes
Property taxes are based on the price you paid for the property at closing so buying a fixer upper is a great way to save on property taxes. You should also check for other applicable property tax exemptions for rehabilitating a property. Research the property tax exemptions in your county and consider contacting the department for more information. Lower property taxes can save you a lot in the long-term.
Not Move-In Ready
Fixer uppers are usually not move-in ready so if you are looking for a place to move to shortly after closing, think again. If this sounds like your situation, then a home in better condition that is habitable and only requires minor work might be right for you. Some people hold off on selling their current home until they can move in and others rent or stay with family. Consider your living situation before pursuing a fixer upper since you might have to pay for two properties until your fixer upper is ready to be lived in.
You need to plan for the unexpected. Home buyers and investors alike need to have a plan B and a plan C in case plan A doesn’t work out. If a significant cost comes up that you can’t afford, what will you do? Will you try to sell the house or will you try to get a loan? Having a few exit strategies planned will not only ease your mind, but it will prepare you for several possible outcomes.
Fixer uppers are not for everyone. And they don’t work out in the owner’s favor every time. It’s a risky investment, but it’s one that may have a huge pay off or could give you the home of your dreams. Consider the pros and cons of buying a fixer upper so you can make an informed decision about your next steps. If you're looking to find out what factors to look for in order to increase the chances of your home's value appreciating, then read How To Buy A Home That Will Increase In Value.
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