Buying investment property can be incredibly stressful but also rewarding and a great opportunity.
If you're anything like me, you spend your limited downtime pinning ideas to renovate and update your home. Human nature loves transformations. The before and after and what it takes to get from A to B. Just tune into any show on HGTV and you know what I'm saying.
So it's natural that people like fixer-uppers. But it's important to know what you're getting into when buying such a property if you plan to rent it or sell it. Investing in the Indianapolis Real Estate market can be a huge success...but you have to do your homework first!
First, let's make sure we're on the same page. A fixer upper is a home that needs rehabilitation before it can be used for it's intended purpose. This could be a house flip or rental. We'll focus on the rental side to begin.
Repairs can range from minor cosmetic work like fresh paint or carpets to more intense renovations such as new roofing, foundation repairs, plumbing or electrical. Or all of those! At the same time, fixer uppers carry a huge amount of risk and can end up being a money pit. Let's talk about the pros and cons of buying a fixer upper.
Pro: Less Competition
Finding a good home in a crowded market is hard. Mostly because everyone else is looking for a nice house. People who are looking for owner-occupant properties don't want a project, they want a home ready to move in.
The same is true for multi-unit properties. Investors will sometimes shy away from purchasing a problem.They would rather buy something that is rent ready. Therefore, when you invest in a fixer upper, you clear out the vast majority of the competition because most people simply don't want to put in the work needed to rehab a home. Instead of competing with the entire population, you'll only have to compete with a fraction of that.
Con: Hidden Expenses
Anytime you begin a rehab and get into the guts of a house, you'll find unexpected issues, problems or needs. You may decide you want a better quality cabinet or you may need new electrical work. You may need new plumbing or have to mitigate mold damage. Even with a ton of experience, until you purchase and begin renovations, there is not a foolproof, 100% guaranteed way of knowing what you're going to spend.
It's pretty simple to build immediate equity in the property through forced appreciation. Appreciation is the concept that a property will gain value over time. What if we could shorten that time? It's difficult to raise the value of a nice, new home. But it's pretty simple to raise the value of a fixer upper and take advantage of an amazing wealth generator.
Take an example; purchase a home for 44k. It needed 38k in renovations so there is now 82k but as soon as it's renovated, it becomes worth what other fixed up homes similar to it's size and condition are worth in the same neighborhood - roughly 100-115k. Choose the right neighborhood and the price can increase. At 2% appreciation per year, well, you can do that math!
The home buying process can be scary but rehabbing a home is not a peaceful experience either. Between all the hard work, planning, measuring, and remeasuring, you'll add up quite a bit of frustration. The more rehabs you do, the easier it gets but there will always be surprises!
Cash Flow and Financing
A fixer upper costs much less than homes with no repair needs. Because of this, your cash flow potential is greater.
Take the previous example. Had the purchase price been for the full after-repair-value, the opportunity for cash flow would be significantly less because the mortgage would be much higher. If the house were to rent after repairs, it would rent for what a 110-115k home would rent for but you would only be paying a mortgage of 82k.
Therefore, your cash flow is much higher!
Most lenders will not hand out cash on a property needing a ton of work. In order to make a purchase happen without tons of liquid money, a private lender or hard money lender can finance the purchase and potentially the rehab.
Con: Out of Pocket Costs
Maintaining budgets while rehabbing a home is difficult and keeping track of your timeline is no walk in the park either. It will be easy to spend more money than originally budgeted and the project will take longer than originally planned. It'll affect you analysis and can also affect your ROI.
It's important to take these things into consideration before purchasing. Though, despite the cons, the pros are pretty great!