Deciding whether to Add Distressed Property to a Portfolio
Fixer-uppers are not for everyone. Investors must decide whether the time, energy, and money needed for problem properties will result in a good return on investment.
In real estate, a fixer-upper refers to property that needs an overhaul or is owned by someone who no longer wants it or cannot continue to hold on to it. In other words, either the property is in distress, or its owner is. Because fixer-uppers are usually ugly and poorly maintained, it should be possible to buy them for far less than the asking price. By fixing what is wrong without spending too much, an investor can resell the property for a tidy profit.
Or so goes the myth.
In reality, fixer-uppers can be challenging. Repairs may end up costing much more than expected. Renovations often take much longer than planned, and this keeps the property off the market for sale or rental for an extended period of time; not only is there no profit or rental income during that time, there are maintenance, taxes, utilities, insurance, and other expenses associated with the property.
All of this means that investors must know what is involved and whether they have what it takes to forge ahead before buying their first fixer-uppers. Specifically, concerning their real estate investment plans, investors must determine whether they have the time, finances, interest, and perseverance to oversee or personally undertake the repair, renovation, or upgrade of a neglected property or solve tenancy or other problems at a property.
Good Time to Buy Distressed Property
Although the real estate market is in a deep freeze in many parts of the world, Stephen Jones, a real estate agent from London, believes that “for those with the time and finances, this is still a good time to buy fixer-uppers.” As he explains, “The price for fixer-uppers is decreasing at a higher rate than other real estate because of increased competition from the lower prices of homes that are in move-in condition.”
By the same token, he notes that, in a glutted real estate market, if an investor plans to sell a fixer-upper after renovating it, “the investor needs to have enough capital on hand after the renovation to sustain the property – in terms of mortgage payments, real estate taxes, upkeep, and other expenses – on the market for a longer time.”
After Due Diligence: Tap all Available Resources
After performing the necessary due diligence on targeted properties, investors need to determine the available resources for fixer-uppers. This does not only mean the investors’ funds. There are also grants and low-interest loans from governments for property rehabilitation. There is also secondary financing, such as second mortgages, lines of credit, and equity loans.
Other often overlooked resources include competent, trustworthy professionals who can make repairs at a property for a little more than the cost of materials, such as relatives of an investor who are licensed electricians or plumbers, shutter fitters, carpenters, and the like.
Know what to Buy
Most investors in real property want only to collect rent each month. This means that investors find much less competition for distressed properties than for properties that are in good condition.
Successful real estate investors study the real estate markets in which they want to invest and note which segments are in motion and which are stagnant. These investors then put their money in the types of property that other buyers are seeking. For example, suppose single-family homes are selling at a faster rate than townhouses in a given market. In that case, a savvy investor will buy a single-family fixer-upper to renovate and resell to a buyer who wants a home in move-in condition.