Buying a fixer-upper home is the dream of many beginning real estate investor. The reality of flipping houses is different than that of reality TV, however. The process of buying a fixer-upper can be stressful, and not all bets pay off in the end. In order to maximize profit, you need to choose wisely and carefully control costs and manage renovations like it’s your job – because it will become your full-time job.
Make sure you know what you’re getting into
If you are buying a home to renovate, your life will become somewhat overtaken by the process. Plan on spending date nights looking at flooring and plumbing fixtures and your free time painting and planning. Be sure to invest in a good set of tools, including drills and jigsaws to handle some of the repairs. The process is anything but easy, but it can be rewarding if you can handle the work. The process is easier if you start your planning well before you begin scanning the Internet for fixer-upper homes.
Develop a general plan
Before you identify your property, make a plan for the process. Are you going to reside in the home? The answer to this question will drive much of the project. In general, you can increase profitability by waiting three to five years after a project. Most costs, including closing costs are fully recouped in three years, with years four and five accounting for profit. These are just general guidelines. Some homes can be quickly flipped for a profit, while others may never recoup an aggressive investment.
Part of your plan should involve determining affordability. Banks have different guidelines depending on whether or not the home will be owner-occupied. If you will be living in the home during the renovation, a lender will look for a total housing expense of no more than 28 percent of your total gross income. Total housing expense includes mortgage payment, taxes and insurance. Beyond your housing payment, a lender will look to limit your total debt payments to 36 percent of your gross income. If you make $100,000 a year, a lender will be comfortable with you having a monthly payment of $2,300, and total debt payments under $3,000 each month.
While there are building loans available, most of these are geared for remaining in the home – not speculating on resale. Check with your lender to see if you can finance a portion of your renovation, but remember that additional closing costs and fees will eat into your profitability.
Determining which projects to undertake
If there are structural problems, and your lender permitted you to go through with the purchase, you’ll want to address those first as part of your fixer-upper renovation. The ROI on structural repairs is priceless because without it, you will be dealing with someone who is in your same shoes – looking to make a profit on a house that needs work.
After structural, consider which inexpensive jobs will be most impactful. Buyers are mostly interested in cosmetic repairs, such as painting, trim work, nice cabinets and curb appeal. Sink your money into the cheap jobs first, such as fresh paint and landscaping, and have a real estate broker give you a broker’s price opinion based on the work. Ask what other renovations would garner the best offers and plan accordingly as your budget permits.
With a solid plan and some realistic expectations, profitable home renovation flips are possible. Manage the process, control costs, and identify inexpensive renovations, and prepare for some hard work. If you plan on living in the home and can invest some sweat equity, you will increase your chances at profit.
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