by Brandon Turner | BiggerPockets.com
So should you invest in a fixer-upper? Despite a few cons, I would say yes, you should definitely consider it because of the overwhelming pros. However, before you jump into your next project, ask yourself these five questions about the deal.
5 Questions to Ask Before Investing in a Fixer-Upper
1. How bad is it?
There are many levels of severity when dealing with fixer-uppers. Some properties need just a few thousand dollars worth of paint, while others need a complete overhaul. As common sense would suggest, the less work a property needs, the less risk you’ll have that something will go wrong during the rehab.
At the same time, however, the less work a property needs, the more competition you’ll face. This is why I generally look for properties that appear to need a lot of work to the general public but that actually just need minor fixes. For example, homes that have a bad smell because of pets or cigarettes are a prime candidate for me, because smells are easy to rectify. An ugly exterior paint job or a bad roof are also fairly easy (if costly) to remedy, but they scare away more potential homeowners. So, before you buy a fixer-upper, I encourage you really look at the property and have an accurate estimate of what it’s going to take to fix it up. Don’t go into a fixer-upper blind.
2. Is it worth it?
Let me ask you a question: Is it better to buy a house for $120,000 that needs $30,000 worth of repairs, or a house that is $150,000 that is 100% finished? With all other factors being equal, the finished house clearly has the advantage. However, many investors fail to comprehend this logic and instead think “fixer-upper” automatically means “great deal.” It doesn’t!
Often, the cost of rehabbing a project will negate any discount you might get. On the other hand, if you could get that same property for $90,000 and put $30,000 into it to make it worth $150,000, now we’re talking!
3. Do I have the time?
Whether you plan to do the work yourself or not, fixer-uppers take time! You have to be present at the property often to make sure the work is being finished correctly, or maybe you’ll end up having to do the work yourself. I have a friend who bought a fixer-upper triplex with plans to live in one unit and rent the other two out, but it took him three years to fix up the two other units and get them rented! While this friend may still have a great investment on his hands, he lost close to $40,000 in potential rent over those three years because he didn’t have time to handle a fixer-upper.
4. Do I have the skills?
Most people who are looking to get started with fixer-upper rental properties plan to do the work themselves. I actually encourage this, as long as the work is on a small scale. Being able to do your own rehab can save you a ton of money and can help you get a good feel for how long projects take so you can better manage the hiring out of those projects in the future. However, if this is your plan, do you really have the skills to take on the project? If not, see the next question in this list.
5. Do I have the drive?
Or more importantly, do you have the mental skills and motivation needed to learn how to accomplish those projects? My first home was a fixer-upper, and I had never swung a hammer in my life! However, I picked up a book on home improvement and began learning on the job. I also called in a lot of favors from other people I knew and had them teach me how to do things. By the end of the project, I could install carpet, tile a bathroom, lay laminate wood flooring, solder copper pipes, and fix a leaky roof—not because I had the skill, but because I had the desire and motivation to learn.
By answering these five questions for every project you are about to take on, you can better decide whether it is the right path for you. Fixer-uppers can be a great way to supercharge your wealth creation, but they also present increased risk. Just be sure to do your due diligence on any fixer-upper you plan to buy and accurately account for the hurdles you might face. Then take action, and get a little dirty!