Are you getting ready to purchase your first home? Then you are likely facing a difficult decision: choose a move-in ready home at a higher price or invest in a fixer-upper. Beware that cost is not the only factor in this decision. Fixer-uppers are substantially cheaper than standard homes, but buying a house that needs attention can be a gamble. Follow these six steps so that you put yourself in the best position.
1. Know Your Intentions
Generally, when someone buys a fixer-upper, it’s for one of three reasons: to live there, to convert it into a rental property, or to flip. If you’re going to live there, you can renovate your home with a personal touch. If you want to rent out your finished property, you need to take all the necessary steps toward becoming a landlord, such as getting familiar with landlord-tenant laws and local regulations. The fix-and-flip business can be quite lucrative, so if that’s your goal, make sure you install top features that sell houses, such as renovated bathrooms, updated kitchens, and large windows.
By extension, you also want to establish yourself as a legitimate business early on to take advantage of tax perks, financing options, and more. Start by applying for an EIN or Employer Identification Number to make tax reporting easy and pain-free. A formation service can help. Several formation services can help you through this process as part of creating an LLC. If you’re unsure about doing it yourself, using a formation company can be a cost-effective option.
2. Budget
Creating a budget beforehand can keep you from depleting your savings. Fixer-uppers can take about a month and a half to finish and cost an average of $45,000, but experts say to include an extra 30% in your budget for unexpected costs. When you take a look at your finances, figure out what your spending cap is and decide if you need to take out a loan.
Conducting market research may also help you decide what to charge for rent or what you’ll sell the property for. It’s wise to study the rental market in the area where you are buying. This will help you gauge what your property can realistically rent for, as well as informing which features you’ll need to have in your property to be competitive.
3. Know Your Strengths
Many renovations can be DIY projects, like painting, creating storage spaces, or redoing floors. However, unless you’re skilled in a particular field, some projects you shouldn’t do yourself. Hire a professional for major remodels, foundation work, roof repair, tree removal, plumbing work, and electrical work. Never deal with a pest, mold, or asbestos problem on your own, either.
4. Start Your Search
Although Porch reports that fixer-uppers are 24% cheaper than the average, that percentage could increase drastically depending on the city. Make it even more affordable by only looking for fixer-uppers that need cosmetic repairs. In order for a home with average needed repairs to be worth the effort, you would need to find one listed for $450,000 or below. Anything that involves an overhaul of the foundation, plumbing, or electrical systems can be extremely expensive. That’s why you need to watch out for houses that are listed as being sold “as is.”
Although “as is” listings are almost certainly fixer-uppers, you won’t know the extent of the repairs without conducting a thorough inspection of the property and its land records. If you do this before you purchase the home, the seller has to address the repairs, not you. Contact a lawyer if you need assistance with a contingency clause.
5. Get Financing
Not everyone has enough savings to throw at a fixer-upper, especially as a first-time homebuyer. Luckily, there are special loans that can make it more affordable for you, such as an FHA 203(k) loan for up to $35,000 or a HomeStyle renovation mortgage for larger amounts. These options link you up with contractors and cover repairs and upgrades, making it worthwhile if you have more than minor repairs to make on a house.
6. Plan Your Repairs
Once you land the fixer-upper you want, it’s time to start your projects. Always start with the major repairs first, like the foundation, roof, plumbing, and electricity. Then, once the internal repairs are complete, continue with walls, flooring, and kitchen and bathroom remodeling. Quartz floors are a great investment and they look fantastic in any space. Also consider smart home technologies that can add security to your property that both you and your tenants will appreciate.
Kitchens are also big selling points, so spend additional time and money on those upgrades. A new island with a range hood is a great choice, as it gives spacial flexibility and aesthetic appeal. After that’s complete, you can focus on design elements, such as adding plants and updated exterior lighting to increase your curb appeal.
Be Strategic about Your Investment
Buying your first home is a big deal, especially if it’s a fixer-upper. Make sure you know what you’re getting into if you go the renovation route. Set your budget based on market research, pick your repairs strategically, add upgrades that have been shown to increase home values in your area, and manage your work through an LLC. If you follow these steps, you are likely to make the most of your investment.
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