Flipping a fixer-upper can be a lucrative investment if you buy the right house.
Watching home renovation shows can get you excited about house flipping, but there is a lot to know before you purchase a fixer upper. A fixer-upper can cost a lot less than a new build or recently remodeled home, giving the buyer more money to customize the property to their tastes. You may also be able to purchase a larger home by acquiring a fixer upper. On the other hand, these types of properties can have major issues that result in more home improvement expenses than you budgeted for.
Here are some ways to determine if a fixer-upper is worth your investment and tips for buying one.
Make sure it makes financial sense.
There is a rule in the house flipping world called the 70% rule. You should never pay more than 70% of the after-repair value (ARV), minus any repair costs. For example, if after you repair a home, the value becomes $500,000, and it will cost you $80,000 to repair it (leaving you with $420,000), you should not buy the home for more than $270,000. You can calculate this by multiplying the ARV by 70% then subtracting your renovation estimate. You can also use the RealEstateInvesting.com 70% rule calculator to get this number.
Determine if it’s in a good location or up-and-coming neighborhood.
Location goes a long way in the real estate market. Home buyers will often pay more to be in a good location. According to uphomes.com, location is the most important factor in real estate. Location is the most important factor in determining the property value of two like properties. What makes location so important? The condition and price of any home can be changed. You can also change the size of the house in many situations. The one thing you can’t change is the home’s location. Location is also important to buyers, because it can determine where their children go to school. Many millennials are buying homes to raise families, and they are looking for good school districts. Buying a fixer-upper can allow you to get into a neighborhood you could not otherwise afford.
The repairs are mostly cosmetic.
Stay away from homes that have major problems like mold, water issues and structural problems. Major issues can be difficult to fix and expensive, especially if there is more than one. There is also less flexibility in terms of the costs of these services. Look for fixer-uppers that require mostly cosmetic upgrades like flooring and paint or new kitchens or bathrooms. While remodeling a kitchen or bathroom can be expensive, you can find ways to spend less and still upgrade the space. On the other hand, there isn’t much budget flexibility when you need to replace the roof, for example. You can upgrade a kitchen for less by choosing materials that are on sale and in-stock. Standard kitchen cabinets will cost you a lot less than custom ones.
Homes in the area have sold recently for a “good” price.
It’s important to research the local real estate market when you are considering purchasing a fixer upper. Real estate values are often determined by the sold prices of nearby properties. Reference the sold price of three similar properties to the one you want to purchase when attempting to calculate what your home could be worth. Look for homes that sold in the past 90 days and are within a quarter-mile radius of the property you are considering. If the recent sold prices in the area are lower than what you would hope to see as a return on your investment, than this property might not be the one for you.
Confirm that the home can be legally expanded.
In some cases, a fixer-upper becomes more valuable if it is expanded or rooms are added. You may also want to turn a single-family home into a multi-plex or multiple condos. Unfortunately, expansion isn’t always allowed. It’s important to check zoning laws in the area before you buy to understand what is and isn’t allowed. In some cities, it can also be very difficult to get necessary permits for construction. This can delay construction or prevent you from building. Local contractors can often provide insights into a city’s permit process and average approval times.
How to fund repairs on a fixer upper.
Congratulations, you found a fixer-upper that meets the criteria above and is a good investment. Now you just need to make all the necessary repairs and home improvements. Unfortunately, many contractors like to deal in cash, and you may not have the necessary funds. Uprova can help. You can request anywhere from $300 to up to $5,000 for just about any expense including home repairs. You can make your request online, any time. Get the funds you need to fix up your fixer-upper now at Uprova.com.