Deciding which rental property to invest in takes a lot of consideration. The purchase price, location, nearby amenities, and curb appeal are just some of the things to think about. But have you ever considered buying a fixer-upper rental property? People love to buy fixer-upper rental properties, and there are plenty of advantages to doing so. However, many property owners fail to weigh both the pros and cons of investing in a property that needs a little extra TLC. Today, we’re discussing the pros and cons of buying a fixer-upper property so you can better decide whether to take on a project home or invest in one that is move-in ready.
Contents of This Article:
- What Is a Fixer-Upper Rental Property?
- Pros of Buying a Fixer-Upper Property
- Cons of Investing in a Fixer-Upper Rental
- Get Help Managing Your Investment Property
What Is a Fixer-Upper Rental Property?
A fixer-upper property is a property that needs some rehab before it can be leased to the high-quality tenants your Philadelphia property management company finds to reside in your property.
The repairs a fixer-upper might need include:
- Light cosmetic work such as a fresh paint job or new carpet
- Roof and wall work
- Landscaping in both the front and back yards
- Foundational work
- Plumbing or electrical work
While some of this repair work may seem trivial at first, it is crucial to look at the bigger picture before deciding to purchase a fixer-upper.
Pros of Buying a Fixer-Upper Property
There are plenty of advantages to buying a fixer-upper rental property. After all, you can secure an investment property at a lower price with less competition and save on property taxes. Here are some of the main benefits of buying a fixer-upper rental property.
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Discounted Prices
- Less Competition
- Increased Positive Cash Flow
- Property Tax and Loan Savings
Discounted Prices
The purchase price is one of the biggest advantages of purchasing a fixer-upper property. For those who want to get into the rental property business but cannot afford move-in ready homes or for those just looking for a great deal, a property that needs work is often a great solution.
In addition, buying a rental home at a lower purchase price, putting in some hard work to make it look great, and leasing it to high-quality tenants who will take care of your property will add value to the home over time. This concept is called appreciation and is great for those who wish to increase the monthly rent at some point. It also helps if you are planning to sell the home sometime in the future.
Less Competition
In a popular location, it can be tough to grab a nice, move-in-ready home for a reasonable purchase price. This is especially true because many property owners don’t want to invest in fixer-uppers, and they do not want to invest the time and money to make the property move-in ready.
However, by investing in a property that needs some upgrades or repair work, you avoid a lot of the competition. Even in a competitive real estate market, purchasing a rental that needs work significantly increases your chance of finding a deal.
Increased Positive Cash Flow
Buying a fixer-upper property at a lower purchase price than that of neighboring properties has the potential to generate more positive cash flow. For instance, buying a rental home below full value means lower monthly mortgage payments. It also means more money in your pocket when you charge competitive monthly rent rates.
Property Tax and Loan Savings
Since property taxes are based on a home’s sale price, your biannual property taxes will be significantly less if you buy a fixer-upper than a move-in-ready home. In addition, some fixer-uppers qualify for an investment tax credit for rehabilitation costs. This means that you may actually make money off the repairs you put into your fixer-upper.
Lastly, the great thing about this investment type is that you may also be able to finance the property using a 203(k) loan. This means that your loan amount can be used to purchase the property and make the improvements needed to make the property livable.
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Cons of Buying a Fixer-Upper Rental
While buying a fixer-upper has several great benefits, it’s important to recognize the potential downsides. You may deal with hidden expenses or more work than you thought there’d be. Here are some of the cons of buying a fixer-upper rental property.
- Hidden Expenses
- Extra Work
- Unexpected Costs May Outweigh Savings
Hidden Expenses
Although you may be able to save money on a fixer-upper thanks to a discounted purchase price, property tax savings, and even a creative financing solution such as the 203(k) loan, there are possible hidden costs of a fixer-upper you may run into once the rehab work begins.
For example, you might start remodeling your property’s kitchen cabinets and then realize your entire kitchen actually needs electrical work. Or, maybe you will discover your antique fixer-upper home is covered in lead-based paint. Maybe you’ll find rotten wood in the roof structure, mold in the bathroom, or leaking pipes in your backyard sprinkler system. In the end, this means more money, more work, and more headaches.
Extra Work
Buying a move-in ready house means you have the luxury of leasing the home to tenants right away, which is one of the reasons they cost so much more. However, if you buy a fixer-upper, whether it needs minor repairs or an entire rehabilitation, there will be lots of work involved.
Oftentimes, the remodeling process can take months. Even if you only project it to take a few weeks, it is easy to fall off schedule. Dealing with unexpected problems, multiple contractors, and the reality that fixer-uppers take time to fix can be a tough pill to swallow.
Unexpected Costs May Outweigh Savings
Sometimes, purchasing a fixer-upper will cost you more in the long run than if you had just bought a move-in ready home. It is critical you do your research before making a final decision on a fixer-upper property. This includes listing the necessary repairs and upgrades you will be making, investigating costs associated with such repairs, and comparing that to the purchase price of a move-in-ready home. Although rare, your remodel could cost you more than your initial savings, thus defeating the purpose of investing in a home that needs work done.
In the end, fixer-uppers pave the way for you to be creative, likely save money, and maintain a slight edge in the rental property business when it comes to positive cash flow. That being said, they are not easy to deal with and present numerous increased risks. If you are looking to buy a fixer-upper, make sure you do your due diligence before making such a large investment decision.
Get Help Managing Your Investment Property
If you are looking for some help managing your fixer-upper rental once it is complete, get in touch with Maryland’s finest property management company, Bay Management Group. Understanding all things property-related, Bay Property Management Group has the knowledge, experience, and staff to manage your rentals so you don’t have to.
Unfortunately, the stress a fixer-upper may cause can only be dealt with by you. However, Bay Property Management Group will relieve all other stresses related to your property once it is move-in ready. We offer full-service management, including rental marketing, tenant screening, rent collection, maintenance, and more. Learn more about BMG today!
