In a strong housing market, you may want to buy a fixer-upper property that fewer people want in order to get in. If you're young and full of energy, buying a fixer to build sweat equity is a good idea. I did so twice to some great returns.
Let me share whether you should buy a fixer-upper and the pros and cons. Remodeling a property is not for the faint of heart.
“Forget money. Remodeling is the number one cause for divorce.” – Anonymous
Before my current house, I had never bought a fixer-upper before. The most I did in the past was build a new bathroom out of a closet, put up a wall to create an en-suite bathroom, and remodel my ground floor by adding a shower and blowing out a center divider so one could fit a bed. Oh, I also changed all of my windows, which wasn't so bad.
After my remodeling activities, I swore never to do another remodel project again because it kinda feels like hell on earth. But that was almost 10 years ago.
After getting ferociously outbid on a particular piece of property ($1.2 million ask, went for $1.8 million), I decided to look away from nicely done properties. There seems to be a massive embedded premium for new or recently remodeled properties that I wasn't willing to pay.
All I really wanted was a view, gosh darnit it. The property itself almost seemed secondary!
Why Buy A Fixer-Upper Property
“Everything is fixable. It just takes time and money.” – I said this over and over again when my patience started wearing thin. And the sad part is that one of my contractors said the same thing a couple months in!
You buy a fixer because it can potentially cost much less and you can customize the property the way you want.
Although building costs are rising every year, the value of your property predominantly comes from land value in the more expensive parts of the country. Once you have this understanding, you aren't as easily enamored by building structures as much because everything can be replicated. Bash a hole in my wall? No problem, I know how to fix it with some sheetrock, mud, and sanding.
The right strategy is to find that perfect plot of land, and then decide to build or alter the building structure to your tastes. Remodel at $500/sqft, sell for $800/sqft. Easy. This is why it's much better to buy expansion property in expensive areas if you want to make lots of money in real estate.
You can have a mega-mansion in Chicago that costs $300/sqft, but you can't make money improving the place because it costs $300/sqft to build! Think land, land, land, land, and more land when you're buying property. You can't build land after all.
When you're full of energy and cash flow as a younger person, you should consider buying a fixer. Use your sweat equity to create your fortune. Eventually your energy and cash flow will fade, by which time you'll hopefully have finished your remodeling.
Founder A Fixer-Upper In Golden Gate Heights, San Francisco
I found my perfect (for the price) plot of land in Golden Gate Heights. The primary allure was the view. I didn't care about the shaggy green carpets, the aluminum windows, the ancient range, and the tiny bathroom downstairs with linoleum flooring because I planned to fix it all. What I wanted was a house on the “right” side of the street where the back faced west and towards the ocean. This way, one could see the sunset and feel the sunshine without being exposed to the road noise.
What scared other buyers away in terms of “a project,” attracted me for the opportunity to customize the home the way I wanted. Besides a view, here are five other things that I was looking for in my next home.
5 Things I Want In My New Home
1) A large bathroom with a double vanity, separate rain shower, large deep-soaking jacuzzi tub, and separate toilet stall.
2) A deck off the master bedroom to go outside and stretch in the morning or gaze at the stars before going to bed.
3) A master bedroom walk-in closet with his and her sections and enough room for a daybed and a couple chairs.
4) A master bedroom large enough to accommodate a king size sleigh bed.
5) An open kitchen that connected with the dining room with a view.
Obviously none of these things are necessities. I just thought if I'm going to go through the hassle of moving, I might as well have some nice new things that don't currently exist in my previous house.
I couldn't find all five of these things in any house on the market at my price range. The house I lost in a bidding war had everything except for a master bedroom large enough to accommodate a king size bed and a real walk-in closet, for example.
No wonder why the new owners who paid $1,800,000 are now spending another $200,000 remodeling the downstairs to combine the two bedrooms into one big room and make a larger closet and larger master bathroom! Take a look at the picture to the right.
I would have more than happily moved in and left everything alone for the rest of my life. Some people seriously have way too much money.
Turning My Fixer-Upper Into My Ideal Home
My new house is not particularly big at roughly 1,800 square feet. But if I can add 100 square feet to the downstair's bathroom, and create a couple decks 250 square feet in total size, I think the indoor/outdoor size combination will be perfect for a family of up to four. It feels like efficient living where no space goes unused.
Having any sort of excess inventory really bums me out. This is why I often try and donate everything I haven't used in a year and keep things minimal.
Buying a fixer-upper enables prospective buyers to get CLOSER to everything they've always wanted. Nothing will ever be perfect about the property because we don't have endless money.
If you can find a plot of land that suits your vision, and then find a home that is large enough to make your desired additions, then that is what I'd buy if I were you. Unless you make and have a lot of money, paying for new construction or a recent remodel is going to cost you a hefty premium. If you're worried about the whole remodeling process, don't worry. There are plenty of contractors in your area who will happily take your money.
By buying a fixer, I think I've been able to save or create roughly $80,000 in sweat equity in five months vs. if I bought a house that was done. The $80,000 in equity wasn't free by any means. It cost me a lot of headaches, stress, and time. The more money you make, the better value it is to buy a completed house and vice versa.
Remember, “money and time fixes everything” when it comes to homeownership. If you plan to go in with your significant other, just make sure your relationship is rock solid before you embark on your remodeling adventure!
Related posts: How Much To Spend Remodeling For Maximum Returns
To Recap, Buy A Fixer-Upper If:
1) You are single or have the most unbreakable, loving relationship.
2) You have connections with contractors, electricians, plumbers, and builders you trust.
3) People have told you, you have the patience of a monk.
4) You have a flexible work schedule, or a partner who can help you keep the workers on track.
5) You are willing to put some sweat equity into making the property better.
6) You desire to customize your home the way you want.
7) You are unwilling to pay a premium for new construction or a recent remodel.
8) You are a masochist who enjoys writing about all the pain and seeing the good in everything.
9) You are a DIYer who wants to learn how to build homes. Apprentices need the hours before they can become licensed.
If you can fulfill four out of the nine criteria above, I think you're good to go! I'm in my third year of owning my fixer and I'm now creating a 260 square foot deck off the master bedroom and changing the old aluminum windows to a beautiful 12 foot sliding door.
The latest project will cost me about $40,000, but it's worth it because I'll finally have my dream deck facing the ocean. It's good to space projects out if you can. I finished expanding my master bathroom from a tiny 36 sqft to a more palatial 170 sqft. It's got a double vanity, private toilet room, double rain showers, and large jet tub.
Another Reason To Buy A Fixer Upper
As you build your rental property portfolio, you will face one limiting factor. That factor is the amount of property taxes you pay. One of the reasons why people don't remodel with permits is so the city can't increased your properties assessed value to charge you more in property taxes.
Not only will you pay higher property taxes if you remodel with a permit, you will also need to spend more time remodeling your property. The inspectors can be very strict and sometimes, there are different inspectors who come who ask for different things. Then of course, you have to pay the permit fee as well.
In my latest remodel, I put down on the permit the project would cost $80,000. The property assessors office unilaterally decided to raise my remodel cost to $135,000! As a result, I tried to fight my property tax increase and finally gave up.
In retrospect, I'm not sure if I should have got a permit. Because the assessor's office also raised my assessed value by $100,000 over the purchase price of my home.
If you buy a fixer upper, you should be able to save on property taxes. The reason why is because the cost to remodel per square foot is less than the selling cost per square foot. The difference is your profit and your savings.
When it comes to making money on a property, focus on expanding the livable square footage of your property.
Remodeled Homes Are Going To Trade At A Bigger Premium
Buying a fixer-upper to remodel is one of the best ways to build wealth. However, the older and wealthier I've gotten, the less I desire to buy fixers anymore. Costs to remodel are going up in this high inflationary environment. But more importantly, for wealthier and older people, it's taking a longer time to remodel.
As a result, remodeled homes will likely trade at bigger premiums going forward. It's so difficult to navigate the planning and building departments nowadays. There are labor shortages and supply shortages. As a result, there will be fewer remodeled homes for sale. Further, there will be fewer people who want to remodel as a result.
Invest In Real Estate For Passive Income
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or have no patience remodeling a fixer-upper, take a look at Fundrise, my favorite real estate crowdsourcing companies today.
Fixing up a home and dealing with tenants can really be a big pain. The wealthier and older I get, the less time I want to spend dealing with real estate and people. This is why investing in private real estate funds is very attractive.
Fundrise is a vertically integrated real estate platform that manages over $2.5 billion. They primarily invest in single-family and multi-family rental properties in the Sunbelt, where valuations are lower and yields are higher. It's free to look and explore.
I've personally invested $810,000 in real estate crowdfunding to earn more passive income.
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