Acquiring a fixer-upper to use as a Pelham rental property can seem like an attractive option to many investors. The less you pay for a property upfront, the more likely it is to produce higher results when you sell it or rent it out. But fixer-upper properties also come with many potential downsides, including those that could turn a bargain property into a financial nightmare. Before deciding to invest in a fixer-upper, you have to consider if it is worth buying. Evaluation of both the risks and benefits can help you decide if purchasing a fixer-upper to use as a rental property is the right choice for you.
Instant equity is one of the reasons rental property investors choose to buy a fixer-upper property. Since fixer-uppers tend to be sold at lower prices than houses in better condition, they quickly increase in value even with just a few repairs and updates. If a property has a lower purchase price, it typically has a lower mortgage payment as well, 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. All these things add up to the highest possible return on your investment.
Buying a fixer-upper property may have potential benefits, but there are a few drawbacks as well. One of these is the difficulty of assessing just how much 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 hidden costs, fixer-uppers also tend to get mired in delays as you have the necessary work done. If you are working with a contractor, they may not be able to stick 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. The longer your repairs take, the more potential rental income you forfeit.
Is It Worth It?
It is entirely up to you to decide if buying a fixer-upper is worth it. Every rental property owner is different, as is every property. Conducting a thorough cost analysis based on the best information you can gather will help you gauge a particular situation and decide if a fixer-upper property is a good fit for your skills and goals.
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. Don’t forget to add 10% to 20% for unexpected expenses. Take 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.
However, a fixer-upper isn’t always the best option. Some investors find that buying turn-key properties is a more efficient and 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.
Deciding to buy a fixer-upper is a decision each investor must make. But that does not mean you have to make that decision all by yourself. Real Property Management Victory has expert Pelham 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 205-793-0700 today!
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