The reality is that many investment properties are in such disrepair that it will cost more to do all the necessary repairs and improvements than it would to buy a home in move-in condition.
This does not mean, however, that it is never a good idea to buy a fixer-upper. There are people who make a fortune moving from house to house, fixing up each one and then moving on to the next. So, if you are serious about buying a sound investment property, read on.
Look, ask and listen
When searching for investment property, look in neighborhoods with resale potential. Ask your real estate professional for a current market analysis of the neighborhood. Research how long other homes were on the market in the area. See what the average homes and the most desirable homes in the area sell for. This will give you an idea on how good a bargain the home is. In addition, ask yourself, is this home in a hot market? Appreciation can help offset the cost of renovating.
Try to find a home that has been listed for sale for several months or vacant. These tend to be better bargains, because usually the seller is willing to consider virtually any reasonable offer.
Do-it yourself...or not
You’ll also want to estimate resale profits before buying a house that needs repairs. A good way to do this is to take the estimated resale price minus the purchase price, your investments (this includes material and labor) and transaction costs. A good rule of thumb is to buy the home for at least 20 to 30 percent below its fixed-up market value.
Consult a contractor to find out how much it will cost to complete the renovations. Figure out what types of improvements you can do yourself, such as installing a new light fixture, painting and simple landscaping.
To make the most profit off your investment, you’ll want to get a home that only really needs cosmetic changes. Avoid homes that need major structural work that won’t add much value, such as a new roof.
Small changes can add big profit
Look and see what types of minor changes you can make that cost less than what they add in market value. The most profitable improvement is paint. A few hundred dollars spent on fresh exterior and interior paint can add much more, even thousands of dollars, to a home’s market value.
Other minor improvements that will give the house some pizzazz while adding to your profit are new light fixtures, countertops and doors. Even new windows, shutters and siding can give a home a dramatic new look.
Major pay offs
Major additions, such as adding a family room or a bedroom, are usually not profitable. For example, adding a bedroom to a two-bedroom home that is in a three-bedroom community rarely adds more market value than the cost to add the room.
The same is true with an overimprovement. For example, adding two bedrooms to the same house to create a four-bedroom home will usually cost much more than the value added. However, adding a second bathroom to a one-bedroom house is usually worth twice its cost in increased market value.
Buying and selling investment property can pay off. By educating yourself on what is a good find, the time and money spent rehabbing a home can result in a profitable investment.
Andy Willis is the vice president of training and career development for Prudential Georgia Realty (www.pgruniversity.com) and has more than 14 years of experience in real estate. In 2002 he was the NAMAR president. Reach him at firstname.lastname@example.org or (770) 992-4100.