Getting a fixer-upper for an Ellicott City rental property seems like a great deal. It is not surprising as the less you pay for a property upfront, the more likely it is to produce higher returns once you sell it or rent it out. But fixer-uppers also come with potential downsides, some of which can turn a bargain property into a financial nightmare. Before investing in a fixer-upper, it is important to consider if buying one is worth it. Evaluation of both the risks and benefits can help you decide if purchasing a fixer-upper to use as a rental property is the right choice for you.
The Pros
Most rental property investors choose to buy a fixer-upper property for instant equity. Since fixer-uppers usually sell at a lower price than other properties in good condition, they often increase in value quickly with a few repairs and updates. You could also gain a higher net profit each month since a lower purchase price usually equals a lower mortgage. You may also save on property taxes in the beginning since your first year or so of taxes are likely to be based on the property’s value when you bought it. All of these add up to the highest possible return on your investment.
The Cons
In contrast to these benefits, there are also a few drawbacks to buying a fixer-upper property. For example, it is difficult to fully assess how much work needs to be done on a fixer-upper property before it will be ready for a tenant. Having a professional inspection can help but may not always catch serious hidden problems with plumbing and electrical systems, the foundation, or other structural elements. Aside from hidden costs, delays due to necessary works are also a problem with fixer-uppers. If you are working with a contractor, they may not be able to stick to an efficient timeline. If you plan to do all or some of the work yourself, you must be honest about how long the planned renovations will take and how much time you can commit to the project. The longer the repairs take, the more potential rental income you will lose.
Is It Worth It?
Ultimately, you are the only one who can say if buying a fixer-upper is worth it or not. Every rental property owner is different, as is every property. Conducting a thorough cost analysis based on the best information you can gather will help you gauge a particular situation and decide if a fixer-upper property is a good fit for your skills and goals.
Your property’s market value after all repairs are complete can be determined by researching several comparable properties in the area. Then, add up the total costs of buying and renovating the property. Be sure to include every expense, including closing and carrying costs (mortgage, insurance, utilities, and so on), as well as the cost of materials and labor for all planned repairs. Allocate an additional 10% to 20% for unexpected expenses. Take your total costs and subtract them from the estimated market value of the house. If your expected return is around 10% or higher, you might just have found a great bargain.
But a fixer-upper won’t always be the right choice. For some investors, buying turn-key properties can be a more efficient but just as effective way to increase your monthly investment income. This is especially true if the property you want to buy is in a higher-end neighborhood, is undervalued by the owner, or has other amenities that make it ideal for a rental property. If you’d rather avoid the hassle of construction, delays in leasing, and the costs of preparing a property for a tenant, then perhaps a fixer-upper property isn’t the right choice for you.
Every situation is unique, and the decision to acquire a fixer-upper or not is something each investor must make. But that does not mean you have to make that decision all by yourself. Real Property Management Prime has expert Ellicott City property managers to assist investors like you in preparing market analysis, setting rental rates, and locating potential properties for sale. Would you like to learn more about what we have to offer? Contact us online or call at 410-415-1736 today!
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