Acquiring a fixer-upper to use as a Burlington rental property can seem like an attractive option to many investors. It is not surprising as the less you pay for a property upfront, the more likely it is to produce higher returns once you sell it or rent it out. However, fixer-uppers also have potential downsides, some of which can turn that bargain property into a financial nightmare. Before investing in a fixer-upper, it is important to consider if buying one is worth it. Evaluate both the potential risks and benefits so you can easily decide if purchasing a fixer-upper to use as a rental property is the right option for you.
The Pros
One thing that attracts rental property investors to buy a fixer-upper property is instant equity. Fixer-uppers typically sell at a lower price than their counterparts that are in a better state and they often increase in value fairly quickly with some repairs and updates. A lower purchase price also usually comes with a lower mortgage payment, 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. Considering all these, you can potentially get the highest possible return on your investment.
The Cons
Together with these benefits are a few drawbacks to buying a fixer-upper property. For one, assessing how much work needs to be done on a fixer-upper property to get it ready for a tenant can be difficult. Having a professional inspection can help. However, it may not always identify serious hidden problems with plumbing and electrical systems, the foundation, or other structural elements. Along with hidden costs, a fixer-upper can also get mired in delays as you have the necessary work done. This could make it harder for your contractor to stick to an efficient timeline. If you plan to undertake all or some of the work yourself, you have to be honest and realistic about the duration of your planned renovations as well as how much time you can commit to the project. Remember that you will be forfeiting more potential rental income the longer the repairs take.
Is It Worth It?
The only person who can answer if buying a fixer-upper is worth it or not is you. Every rental property owner is different, as is every property. To help assess a particular situation and decide if a fixer-upper property is a good fit for your skills and goals, it’s important to conduct a thorough cost analysis based on the best information you can gather.
Research and locate comparable properties within the area to determine what your property’s market value will be after all repairs have been completed. 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. Most investors allocate an extra 10% to 20% to cover any unexpected expenses. Total all your costs and subtract them from the estimated market value of your rental house. If your expected return is around 10% or higher, you might just have found a great bargain.
A fixer-upper is not always the best option. For some investors, buying turn-key properties can be a more efficient but just as 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.
Every situation is unique, and the decision to acquire a fixer-upper or not is something each investor must make. But you do not have to make that decision alone. Real Property Management Sterling has expert Burlington 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 802-861-6468 today!
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