Homes needing repairs and renovations can be purchased at a lower price. After fixing up the home, investors sell it for a higher amount. When done correctly, flipping houses can earn a decent profit. But before beginning to buy and resell a fixer-upper, it is wise to research both the advantages and risks of flipping property.
People usually invest a good sum into fixer-uppers, and not understanding the business can result in a loss. However, flipping properties can be an excellent way to earn money when done the right way.
Benefits of Buying a Fixer-Upper
Purchasing a fixer-upper is a rewarding experience and provides many advantages for savvy homebuyers wanting to get into the real estate business.
Cost Savings
Flipping houses for investment is known for its return on investment and cost savings. It’s common for cash buyers to purchase a property as-is. They don’t require the seller to fix anything to make their offer competitive. Learn more about cash house buyers here if you’re curious about this investing strategy.
Lower initial purchase price
Fixer-uppers often sell on the real estate market for a more modest initial cost than move-in ready homes. This financial benefit attracts first time home buyers or those working with a tighter budget. The appeal lies in the potential to own a property at a lower upfront expense, making home ownership more accessible.
These cost savings can free up funds that investors can use for repairs or to establish a financial safety net for unexpected challenges during the renovation process. Buyers need to conduct a thorough inspection to understand the scope of required repairs and accurately estimate the total investment needed.
Potential for increased property value after renovations
Fixing up a home can be a smart financial decision by addressing issues, modernizing outdated features, and improving looks. Besides enjoying the home more, renovations can increase its appeal in the real estate market and potentially raise its value, allowing homeowners to build equity and profit when selling.
Careful planning and understanding the local market are key to ensuring renovations match what buyers want and help the value grow, balancing renovation costs and expected value increases. Unlike pre-built homes with set layouts and choices, a fixer-upper allows tailoring adjustments to fit preferences. This customization separates fixer-uppers in real estate. Buyers can pick materials and finishes matching their taste, making the home reflect their style. Whether dreaming of a sleek modern kitchen, a cozy reading nook with natural light, or a quiet backyard spot, the freedom in renovation adds to ownership and investment. The process lets homeowners experiment with designs and create beautiful spaces to sell.
Investment Opportunity
Investing in a single fixer-upper home can open the door to further prospects. In 2022, the return on money spent fixing up and selling houses, known as the ROI, was almost 27%. That means for every $100 invested, about $27 came back. Over the past five years, the profits from flipping homes have continued rising.
When deciding if a rundown house is a smart buy, many investors use the 70% rule. It serves as a guideline. According to this rule, you should pay no more than 70% of what the house could be sold for after repairs. Let’s say estimates say a fixed-up house would sell for $250,000. Needed repairs cost $50,000. Then, the maximum to pay would be $125,000 ($250,000 x 0.70 – $50,000).
Building equity
Besides potential money gains, renovating a fixer-upper contributes to building equity. Equity refers to the difference between a home’s current market value and what’s still owed on the mortgage. It’s a valuable asset for homeowners.
As work adds to a property’s overall worth, equity accumulates. This provides stability and leverage for later considerations. Whether funding schooling, making other investments, or getting a line of credit, the equity built through smartly improving a fixer-upper is helpful. It could be worth making a strong cash offer to secure a good deal. Fixer-uppers, although rough around the edges, can be the best investment opportunities in real estate.
Cons of Buying a Fixer-Upper
Determining if flipping houses is suitable involves weighing the drawbacks, from purchase to resale.
Hidden Expenses
Buying a home needing work carries potential for hidden expenses, making it important for buyers to carefully consider each step of the renovation process.
Issues during renovations may not be obvious
A primary downside of buying a home needing work is the uncertainty involved in renovations. What seems a straightforward project can quickly become more complicated if unforeseen issues arise. Structural problems, electrical difficulties, or plumbing issues may only surface after work begins. Unexpected costs, changing materials prices, or contractor problems can contribute to budget challenges, delays to timelines, and financial stress. That’s why including extra money in the budget for unexpected costs when renovating a home is essential.
High costs during renovations
Homeowners face high costs while renovating, like mortgage payments, property taxes, and utility bills. The longer renovations take, the more these expenses accumulate, adding financial pressure. This can specifically pose challenges if renovations exceed the initially expected timeline.
Time and effort
Buying a home that needs work demands a lot of time and patience. One challenge of fixer-uppers is long timelines during renovations. Unlike move-in ready houses, fixer-uppers don’t let you live in the home right away. Renovations can take more time if problems come up, the weather causes delays, or contractors are busy. Homeowners must be willing to wait before selling the updated house.
Skills and expertise
Another issue with fixer-uppers is the need for do-it-yourself skills or relying on others for repairs—major or minor work may mean getting your hands dirty. People with carpentry, plumbing, electrical, or construction experience could handle some tasks themselves. However, those lacking such abilities must hire contractors, which adds coordinating schedules and overseeing work. Managing professionals involves finding skilled help, checking progress, meeting deadlines, and clear communication. Relying on others can cause stress and complications for busy homeowners or those new to renovations.
Even the best contractors can make mistakes, so managing renovations carefully is important. Miscommunication, lack of oversight, or unexpected challenges may lower quality. Carefully choose respected contractors known for good work. Get detailed estimates and be clear about expectations. Take your time researching professionals to find the best fit for your schedule and needs.
How to Successfully Buy and Renovate a Fixer-Upper
If you’ve decided a fixer-upper could be worth the effort, the next step is key. Follow these tips for a successful project:
- Have the home thoroughly checked first: Paying for a complete inspection gives important information. A qualified inspector will look for things like structural problems, electrical issues, plumbing concerns, and more. This deep look helps you understand the renovations needed and make wise purchase choices. Finding potential issues early saves time and money in the long run.
- Determining renovation experience: Some people have skills for do-it-yourself projects, while others may require contractors for specialized repairs.
- Smart budgeting and extra planning: Calculate purchase and repair costs, including materials, labor, licenses, and unexpected expenses. Set aside at least 10-20% as extra funds to address unexpected challenges. Consider your credit rating, debt compared to income, and financing options before starting a fixer-upper.
- Prioritize based on needs and resale value: Focus on repairs adding significant value, attracting future buyers.
Select a good neighborhood: The area matters long-term for value and selling chances. Choose places with amenities, schools, and community spirit boosting appreciation. - Get a home warranty: Coverage covers major systems and appliances, protecting against unexpected issues common after repairs to older homes, considering uncertainties. It provides investment security.
Purchasing, renovating, and selling a home in need of repairs can appear complex, yet it often proves profitable with careful planning and spending. During the first three months of the upcoming year, homes requiring work accounted for 9% of all property sales across America. Whether embarking on such a project initially or having experience, ensure investigating the community and desired aspects, consulting real estate experts when helpful, and watch your funds closely.