Acquiring a rental home is great investment. The question is – should you by a fully renovated home or buy a “fixer upper”?
Buying a fixer upper can be an attractive choice. Picture having good architectural building in a good neighborhood at a very low market price. Attractive isn’t it?
However, purchasing a fixer upper can be a lot of work. Before you purchase a fixer upper, you need to carefully consider the full price of this home.
Ask these simple questions before making a decision for your next (or even first) investment home.
Do I have the time to do some handy works?
Fixer uppers need your time and attention. Even if you plan to contract the work to someone else, you still need to watch the progress and oversee the repairs.
If your budget includes hiring a contractor, you need to do your due diligence. Research some contractors that fit your budget and see their sample works. Discuss with your contractor what improvements they think the house needs and finalize a timeframe and a budget for the repairs. Contractors are notorious for taking longer and costing more than quoted, so be prepared and have a solid bid and scope of work.
Contractors are often times difficult to find and hard to manage, so think carefully before you hire and we recommend getting a couple of contractors lined up in advance so that they are prepared once you close on the home.
Do you have enough money?
Most fixer uppers require that you have cash for purchase and cash for repairs. While there are lenders (called Hard Money Lenders) who will loan a percentage of the after repair value on the home, they typically want to see that you have some cash in the deal. Having a reserve of capital is going to be important for this option. They also typically only want to lend for 3 to 6 months.
Hard money lender do charge a higher interest rate than traditional financing, but for homes that will not qualify this is a viable option.
Also remember that if you are planning to rent the property out versus selling it to a retail buyer, you can’t refinance until you have held the property for a year or sometimes more. In this case, using hard money lenders, the high interest rate and the short term financing will often mean keeping it for rental is not a viable option.
What do I need to change or improve?
Does the property need cosmetic changes or will it require an architectural/structural change? Cosmetic changes would mean making the house prettier like adding landscape features, changing the paint, or updating light fixtures.
Architectural changes are much bigger job and will require a bigger budget and a longer holding time. Architectural changes would be from tearing down a wall, reestablishing the foundation, changing out all the plumbing, or gutting the kitchen or bathrooms.
When evaluating rental homes, there is a lot to be said to buying homes that are already rehabbed. With a pretty home, you can immediately get permanent financing which is at a much lower interest cost, secure a tenant quickly and the home can immediately start providing a return.
Interested in buying an investment property? Contact us today and we will be happy to help you source your next rental.
