Buying fixer-uppers can seem like a good option to many investors who want a Bellingham rental property. 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. 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. Once you have evaluated both the risks and benefits, you can easily decide whether purchasing a fixer-upper to use as a rental property is the right choice for you.
Rental property investors often buy a fixer-upper property for instant equity. Most of the time, fixer-uppers often sell at a lower price than their counterparts that are in better condition, so they increase in value fairly quickly after a few 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.
Together with these benefits are a few drawbacks to buying a fixer-upper property. 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. Professional inspections, though helpful, may not always uncover 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 are doing some or all of the work yourself, it is best, to be honest about how much time you can commit to your planned renovations and the entire project. Longer repairs mean you would be forfeiting more potential rental income as well.
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. 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.
Researching and locating comparable properties in the vicinity will help you determine your property’s 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. Most investors allocate an extra 10% to 20% for unexpected expenses. Once you have computed the total cost, deduct this 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.
But not at all times will a fixer-upper be the right choice. 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.
Deciding to buy a fixer-upper is a decision each investor must make. But that is a decision you don’t have to make alone. Real Property Management Teyata has expert Bellingham 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 206-861-5525 today!
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