Fixer-uppers on the market tend to be listed at incredibly enticing price points, and that leads many investors to considering them very seriously.
- Up-Front Investment: Purchasing a fixer-upper property, which may require more down due to the increased risk.
- On-Going Investment: Short-term investment to fix up home (and then any costs to own/maintain it until it sells).
- Return on investment: Potentially low. You need to be careful with numbers to come out in the green.
- Best for: Any place with a hot housing market where you know there’s a good chance the fixed-up property will sell quickly.
How It Works
You've probably heard about "house flipping" before and how many people have claimed to have gotten rich doing it. While it's unlikely to make you a millionaire, house flipping can be very profitable if you find the right properties and know some key professionals.
A house flipper is someone who buys a property in need of repair (especially foreclosures and auction homes, but they can also just be outdated units) and then fixes it up with the intent to sell it for a profit--usually a very large profit if they play their cards right.
It sounds like the perfect plan: You’re buying up houses for cheap that are in dire need of repair, you give them a new look at-cost, and then you list it on the market for a good price. You profit, and the community also wins because you just fixed an eye sore.
It sounds like a wonderful plan and a great way to improve the curb appeal of any town, but it’s not quite as simple as it seems.
Getting the upfront capital to buy a house, and then pay for all the repairs in a timely manner so you can put it on the market, is perhaps the most difficult part of the whole plan.
Experts suggest going back to your team of professionals before getting into the house flipping market. You should have some construction experts and some people well-versed with the legal and accounting side of things to help you buy, fix, and sell in a timely manner.
What happens if you sit on the property for too long? Financing costs will eat away at your profits. You’ll have to be able to sell it at a high cost just to break-even on the whole thing.
When it comes to flipping houses, being able to precisely crunch the numbers is essential to pocketing a good deal of profit when it’s all said and done.
Another challenge? Buying a house without having to put down a large downpayment. That can be difficult with little/no down financing options being very hard to come by from trusted lendors. Plus, when you're buying a fixer-upper property, lenders know there's a greater risk because these properties are harder to sell, which generally means they expect more down.
But, balancing the books is important with this part and everything else to do with such a high-risk investment. If you put down too large of a downpayment, where’s the capital for fixing up the house going to come from? If you have to finance all the repairs in addition to the house purchase, that’s when interest can begin eating up the profit margin you had set.
As a final consideration, just note that your long-term profit plan relies on you buying and flipping houses regularly. Once a home sells, you either pocket a profit or a loss, and then you move on. The idea is to profit from one sale so you can put it right into a new project.
It’s definitely a more “active” form of real estate investing compared to owning a rental property.
The real pro of purchasing a fixer-upper is that you have the potential of making a solid profit, so long as you have carefully considered all the financial aspects.
Overpaying for the property, putting too much down, taking on too big of a project (expensive repairs), and sitting on the house too long before it sales can all turn your house flip into a flop. That’s why you need professionals on your side who can help with estimations.
The biggest con of working with a fixer-upper property is the risk. The risk of buying the property and not being able to afford the repairs, or the risk of finishing/half-finishing the repairs and then not being able to sell it and at least break-even.
Crunching the numbers is vitally important to coming out of a house flipping deal on top. Having a team of trusted professionals who know the area and are specialized in pertinent areas can help you make the right choice when it comes to choosing a property, establishing your financing terms, and even figuring out what repairs need to be made (and their budget) in order for the house to sell.
If you do your due diligence, flipping houses can prove to be lucrative, especially if you're able to buy a home in need of update in a "hot" neighborhood where you know buyers will be willing to pay the extra price for a state-of-the-art home when it's all said and done.