Fixer Uppers: Are They Really Worth It?
Fixer uppers, or "flippers," are all the rage in the current market climate. Now, because of 1031 exchanges and other changes to the capital gains portion of the federal income tax code, many people are wondering why they shouldn’t try it.
With the right circumstances, you can make an excellent return on your investment. But is the process of buying a rundown home, fixing it up, and selling it for a profit a license to print money? Here are some things to consider before attempting a Fixer Upper.
The Market
No improvement can save your investment home if the market goes south. A fixer upper can typically take anywhere from three months to a year to improve. But how long it will take to sell is anybody’s guess. Your best bet is buying in a hot seller’s market and allowing yourself six months for improvements. Some sellers even list the home right away so that it’s active during the improvements.
Improvement - Know How
Painting the exterior or interior of your investment home is a fairly simple task. But are you prepared to remodel an old bathroom or kitchen? Have you ever installed a sink or wall cabinets? If not, you should factor in the labor costs of these improvements along with the materials. Also, it might be a good idea to draft up an Independent Contractor's Agreement and have your contractor sign it before agreeing to a bid. This will help ensure that the job adheres to an agreed-upon schedule.
Improvements ROI
Generally speaking, improvements that merely meet minimum standards won’t give you much of a ROI or return on investment. Conversely, adding too much in improvements compared to other homes in your area will also lead to a poor ROI. Adding relatively inexpensive improvements, like a carport to a property that doesn’t have a garage, usually yields a good return.
Taking Transaction Cost Into Account
Along with the purchase price and improvement investments, will the higher resale value of your home cover the transaction costs of the sale? This is an oft-overlooked factor when calculating an ROI.
About the Author
Chris Parry is a successful freelance writer and journalist, and has provided features for many media outlets including About.com, InternetContent.Net, and eFilmCritic.com among others. His most recent features include contributions to Lake Arrowhead Real Estate, a user's guide to buying real estate in Lake Arrowhead that includes access to the Lake Arrowhead MLS.
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