5 Questions to Ask Before Investing in a Fixer-Upper
How to know you are making a good investment.
You want to become a real estate investor, but the only thing you can afford is a fixer-upper.
Your plan is to buy something below market value, make some improvements (maybe while living there), and then rent it out. Long term, you’ll refinance to access the rehab cash, and then either sell it or continue renting it out.
The old Live-In Flip!
Sounds like a good plan, right? So, you link up with a realtor and begin touring homes. After visiting a few homes, you find one where the numbers make sense and it seems manageable to fix.
You are ready to make an offer, but then you get cold feet. You have never bought a house before or completed any major renovations. You begin doubting your knowledge, research, and strategy.
What if I’m not ready?
What if I screwed up the numbers?
What if I go over budget on the renovations?
I was once in your same shoes, doubting everything. So I developed a list of common questions to ask yourself before making an offer on a fixer-upper, to help give you confidence in your investment.
If you are nervous about buying your first fixer-upper, stop and ask yourself these five questions first.
1 - How bad is the house?
Does the home just need some paint? Or does it need to be completely gutted?
The more projects you tackle, the more that can go wrong. For example, replacing a rotting door jamb could turn into replacing three rotting floor joists!
Speaking from personal experience here!
Anyways, the point I'm trying to make is that before you pull the trigger on a fixer-upper, you need to understand two things:
What projects you will be tackling?
How much will those projects cost?
2 - Is the project worth your time and money?
Not all fixer-uppers are worth it.
Let's say you have two options.
Buy a $120,000 fixer-upper that needs $30,000 in repairs
Buy a $150,000 house that needs no repairs
Some investors might immediately think that the fixer-upper is a better deal.
They are wrong.
$120,000 to $150,000 with $30,000 of repairs is really tight. Any projects that are out of scope will break your bank. And there will be projects that are out of scope that will come up.
However, if you could get the same property for $90,000, put $30,000 in, and make it $150,000, that's a different story.
3 - Do you have time to devote to renovations?
Whether you plan on doing the work yourself or hiring someone to do it for you, fixer-uppers take time.
If you plan on doing the work you have to plan projects, complete projects, and fix them when they don't go as planned.
If you plan to hire someone to do the work, oftentimes you have to be on-site and make sure the work is being completed correctly.
I didn't understand how much time my fixer-upper would take. From purchase to move-in, I was working 80-hour days: 40 hours at my day job and 40 hours at the house. For four months, I was heads-down, grinding on this property. I had no time for friends, hobbies, or anything else.
So, before you buy a fixer-upper, ask yourself if you actually have the time for one.
4 - Do you have the skills needed to manage a renovation?
Most people who buy fixer-uppers plan on doing some of the work themselves. This is a great idea, especially if you plan to buy a few other fixer-uppers in the future.
Completing and managing fixer-upper projects helps you do a few things:
Save money on labor
Learn the skills needed to get the job done
Figure out how much certain projects should cost
Understand how long it takes to complete certain projects
Determine whether or not you want to tackle certain projects in the future
But even though there are a lot of great benefits to tackling renovation projects, there are a lot of things that could go wrong.
What if you start a project and realize it’s too much work?
What if you begin a project and you don’t have the skills to complete it?
What if your lack of skills actually makes it more expensive to complete the project compared to just hiring someone?
DIYing is a critical aspect of getting your money’s worth on a fixer-upper, but so is understanding where your skill gaps are and hiring qualified contractors when it makes sense.
5 - Do you have the determination to persevere when things get difficult?
Fixer-uppers are difficult, especially if you plan on doing a lot of the work on your own. You're going to tackle projects that are going to make you want to pull your hair out. But, you need to have the will to persevere and the motivation to keep going.
By answering these five questions, you'll have a clearer understanding of whether or not you should pursue that fixer-upper.
If you are thinking about buying a fixer-upper, ask yourself these five questions first:
How bad is the house?
Is the project worth your time and money?
Do you have time to devote to renovations?
Do you have the skills needed to manage a renovation?
Do you have the determination to persevere when things get difficult?
Buying a fixer-upper can be an extremely rewarding experience, but you need to have the drive to keep going, even when the going gets tough.
There is no magic eight ball when it comes to determining which properties to invest in. But by asking yourself the right questions, you can help yourself make better investment decisions.