Starting your rental business: Should you buy a fixer-upper for your property?

 

 

You may be considering buying a “fixer-upper”, dated property, or property in distress to fix-up and use as your rental property.  Before you jump in, there are many things that you need to consider!

First, what kind of market are you in?  Are you in a market where hardly any properties are available, and people get into bidding wars over absolutely anything?  Or, are you in a market where there is a large difference in purchasing costs between a house that “needs some love” and one that is ready to rent?  In those situations,  a property that needs work could be your best bet.

However, if you’re in a market more like I’m in, where there’s a lot on the market, and there’s a small price difference between a property in need and one that’s already updated, then a fixer upper is only going to cause headaches and delays in rental income, and likely offer no benefits.  It could even cost you more!

Any property will likely need some work, and money should be budgeted regardless.  But, with a fixer-upper, lots of money is needed.  Lots.  Investigate what flooring, cabinets, and counters actually cost.    Investigate availability of the materials and installation time frames.

Also, do you have trusted people to help with the work?  People who are available (and reliable) when you close on the house?  What will they likely charge for  their work?  Are you planning on doing a lot of the work yourself?  Have you done this type of work before?    And if you’re relying on family and friends, you could be in for a disappointment.  Some people will simply leave you hanging.

Are you a planner?  Do you mind phone calls, tracking down materials, finding out what happened to people?  Can you (nicely but firmly) confront someone about inferior work?  Do you get stressed out easily?   How much time can you take to either do the work or arrange for the work?

In addition to spending money on the work, and already paying insurance and taxes, you will not be bringing in money for a while.  Money will be going out and not coming in.  Can you afford not to have the income for a few months?  Even with a simple face lift it could be a month or two before you can get tenants moved in and paying rent.  If more work is needed, and permits and inspections are involved (very important for legal and safety reasons), expect delays.

Will improving the property make that property over-improved for the area?  If you have the one property that looks amazing and updated, you may not have made a good investment.  You want a property that will rent (and, maybe later, sell) well, and cover those extra costs you just accrued.  And no one is going to pay you what you want for a gorgeous home in a horrible neighborhood, no matter what you’ve done.  Experts aim for the worst house in the best neighborhood, and never the largest house.

Always remember to get a home inspection.  Even if you plan on demolishing almost everything, get the inspection!  You will learn a lot about the property, and possibly what really needs to be done (not just what a sales person says needs to be done), and what can and can’t easily be fixed.

One final note: be realistic about costs and time frames.  In this age of HGTV (which, I confess, I LOVE) we’re inundated with flippers who can restore homes for incredibly low costs.  These people have their own crews, a ton of experience, and call in lots of favors.  Expect to spend at least double what they spend.  No matter how hard you try, chances are you won’t be able to redo the kitchen for $8,000 or a master bathroom for $4,000.  It’s not real life and has led many people to make assumptions that become expensive mistakes.  Don’t let that be you!

2 thoughts on “Starting your rental business: Should you buy a fixer-upper for your property?

  1. Right! And the costs of mortgage payments, insurance, and taxes on an rented house waiting for permits and inspections have to be a terrible negative.

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