Buying a house that needs renovation is a real estate strategy that requires work but could be a smart move for investors and first-time homebuyers.
Fixer-uppers are increasingly popular and make great investments if you choose the right one. Depending on the area, a fixer-upper may be available at a lower cost than one that is move-in-ready, saving you big.
Before buying, it's essential to know if a fixer-upper is right for you. Here are a few things you should consider.
Mortgage Options
Deciding whether it's worth it to buy a fixer-upper should be one of the first steps people take when purchasing a home.
Envato/MargJohnsonVA
For most people, saving up for a down payment on a house is a financial goal that could take years. Lowering expectations can make the dream of homeownership a reality.
Different finance options are available depending on the type of home you would like to buy. There are several loans for first-time homebuyers that allow you to purchase a fixer-upper and pay for renovations with a single loan and mortgage payment.
Checkout this article to learn more about mortgages for first time homebuyers.
For example, the Federal Housing Administration's 203(k) loan program allows mortgage borrowers to buy and renovate a fixer-upper.
Envato/maxxyustas
The loan amount is based on the property's future value when the work is completed. You will need a 3.5% down payment and a minimum 620 credit score to qualify which can significantly lower the price of entry.
Private mortgage insurance (PMI) is required for any down payment lower than 20% until the balance drops to 80% of their home's market value.
Appreciation
Appreciation in real estate is defined as a property's value increasing over time.
With any rehab, your goal is to boost your property's value. While you cannot control the economy, you can control the appearance and upkeep of your home.
Envato/ijeab
This is where remodeling and improvements can help contribute to home appreciation. Choose remodeling projects that will result in the most value for the least amount of effort and cost. If you want to learn more about what gives value to a house, you can read this article for more information: buying a house.
Calculating the Cost of Repairs
Understanding how to calculate repair costs throughout a rehab deal is instrumental. Common interior repairs include paint, flooring, kitchen, appliance, bathrooms, framing, insulation, doors, and trims.
The 70% rule helps flippers when they're scouring potential investment opportunities and is an excellent guideline for buying a primary residence.
Envato/ijeab
The 70% rule relies on a simple calculation:
After-repair value (ARV) ✕ .70 − Estimated repair costs = Buying price
The buying price will help you determine how much you should spend on a home you plan to renovate. Going above that price could jeopardize profits.
Scope of Work
The first step of this process is to assess the other homes in the neighborhood to avoid over-improving the property. For example, if none of the other houses have crown molding and high-end countertops, adding these amenities to a fixer-upper project will not increase the price.
Envato/winnievinzence
Focus on the basics that every buyer expects when purchasing a home, such as a roof that does not leak, a reliable furnace, solid floors, walls, and functioning plumbing and HVAC systems.
- Budget for new doors and their corresponding hardware, as they will dramatically impact the feel of your home.
- Budgeting for flooring when conducting a rehab is almost always a good idea, as its perceived value is unmatched.
- Be sure to account for interior paint when calculating your repairs.
- DIY enthusiasts can do some of the work themselves.
- Safety-critical tasks will require licensed professionals.
When hiring a contractor, ensure you get multiple estimates, check their past work, check insurance and bonding, and check with the Department of Building (DOB) for permitting requirements.
Envato/garloon
Managing Renovation Expenses
It's no secret that construction materials are some of the most significant expenses subcontractors must deal with throughout a project.
While all contractors are different, one thing remains true when purchasing materials from a supplier:
You will always get their best price when paying upfront in cash.
Paying for materials in cash will result in discounts that help you save money in the end.
Material resale and reuse centers are also very popular. They are like the thrift of hardware stores.
Final Thoughts
Envato/garloon
One of the most significant selling points of a fixer-upper home is that it can help you afford a bigger home in a better neighborhood.
Regardless of the reason, it is always beneficial to purchase a home that is priced well.
The BRRRR method is a great way for first time homebuyers and for investors to build a passive income, if they’re willing and able to put in the work.
BRRRR means “buy, rehab, rent, refinance, repeat.” This method targets distressed properties that can be purchased at a reduced cost, rehabbing or flipping the property, renting it out, getting a cash-out to refinance, and then using that cash to invest in more properties.
This method is ideal for those who have a good understanding of the rental market in their area as well as rehab costs.
